Bull and Baird Blog - June 1, 2016

Equities start the day lower as apparently someone built a wall at 2,100. Trump, the Nights Watch, members of the Qin Dynasty, Hadrian’s legions, I don’t know… some of those or all of those must’ve been involved because we can’t get thru 2,100 for the life of us. Now there’s a few reasons why we can’t get but the most important of them is this: sentiment peters out around these levels. We keep seeing the same thing over and over again: market acts weak, sells off to 2,075 or 2,050, sentiment gets sour as a patch of kids, the market reverses, everyone gets caught offsides, and we rip back to 2,100. The problem is there’s nothing to take us past there. Macro won’t do it, it’s consistently tepid. Earnings haven’t even tried because they are too busy contracting. Then we get big picture stuff like Brexit or a Fed Hike that halt everyone in their tracks because who wants to stand in front of one of those trains? I mean at this point why even bother? Why not miss the next 20-30 points and just buy the breakout instead? I would but I don’t run money, I just sit here typing hoping someone will listen. Heck, I might be the best armchair quarterback in history! Anyway, here we sit waiting for a reason to go higher while two massive events loom in the distance. Anyone think we’ll remain here until those two get resolved? Does a bear… oh forget it.

After the open the open we retreated from the Wall for all of 15 minutes before clawing our way back to 2,100. Oil was lower overnight until a story came out that OPEC May Consider New Oil Output ceiling at Thursday’s meeting”. So wait...hold on…let me get this straight. Oil at $25, pump it like it’s hot. Oil at $50 and it’s time for a production cap? I mean what levered long 3x oil futures and options fund came up with this headline? Ugh. Anyway, oil rallied and it brought the market higher with it. Couple macro data points in the morning: ISM manufacturing in the low 50s, Markit Manufacturing PMI in the low 50s, and Construction spending slightly lower. Nothing at ALL there to talk about, same as it ever was. What we do need to talk about though is EQR (we rate Neutral). EQR is an apartment REIT that just so happened to have warned us about “falling rents in NYC and SF” and that warning managed to knock 4% off the stock price. Let’s break this down shall we because there might be more to this story than we think. My initial thought was that both a Wall St slowdown and a Tech bubble slowdown were the primary culprits but that’s probably only scratching the surface. Recall that the BIG theme lately has been “everyone will rent going forward because housing sucks” oh and Millennials hate owning things. Builders have been cranking out multifamily dwellings to play this but what if we just saw the top? What if this whole thing was a fad and people do indeed hate renting forever and actually want a home at some point? Way too much apartment supply + a potential fad + demographic bulge + easing lending standards (recall both Chase and WFC are offering 3% down mortgages) + a hatred of doing laundry with quarters and doesn’t housing all of a sudden seem a bit more interesting? If you are HD or FBHS or LOW or SHW aren’t you licking your chops? Anyway, by lunch we sat on unchanged because 2,100 is the new magnet.

We got the Fed’s Beige Book in the afternoon and while it had a somewhat subdued tone to it that’s not going to stop them from raising rates in June or July. We closed at 2,099 after starting the day at 2,085 so I guess that’s a win. We get a smattering of data tomorrow and one last jobs report before a potential hike on Friday so I imagine the market will be fairly sideways before then. Maybe people are just waiting for clarity before buying? That’s my absolute favorite “useless phrases” you hear ALL the time. Clarity…as if such a thing even exists. Yep, I’m in the prediction business but I need to be sure before making a call. Hilarious. Final Score: Dow +1bps, S&P500 +11bps, Nasdaq +8bps, Rus2k +71bps.  

Volume was slightly below avg. Our desk was evenly matched. Buying in Tech and Industrials. Selling in Energy and Software. Shorting in Energy. News Highlights:

  • Succinct Summation of the Day’s Events: Europe and Oil led us lower. Oil reversed on some goofy headline and the market rallied with it. We’re probably going to sit here for a while.
  • Mary Meeker has her new Internet Trends Slide deck! Check it out here, it’s so good
  • What are a couple of my favorite slides from it? 1)  I mean doesn’t Gen Z look pretty good? I love their last 3 traits 2) This is the most impt chart in the history of retail 3) just own FB and GOOG?
  • Notes from the London Value Investor conference here
  • Howard Marks spoke there, some random comments: “If you hear that an asset is so dangerous that there is no price at which it can be bought your antennae should prick up. It probably means it is a good time to buy. Throughout his career he has bought assets that other people would not invest in. When an asset class gains a reputation for being unseemly and becomes stigmatised like high yield bonds in the 1980s, emerging markets in the late 1990s, bank securities in 2008 and more recently the oil sector it is usually time to buy. Oaktree put some money to work in the oil sector earlier this year. They have been doing more commercial real estate investing than anything else over the last five years. The real estate market is heterogeneous. Prime office buildings are expensive in the US today. They have been busiest in out-of-the-way places in non-prime properties. He mentioned that they have been buying zombie properties that require renovation and new tenants which they have been buying from banks at a discount.”
  • Remember how we were supposed to sell the market on the big jump in Margin Debt? “There are too few peak/trough episodes in this overlay series to take the latest credit-balance data as a leading indicator of a major selloff in U.S. equities. However, current level is well off its record close in April of last year and showing a pattern similar to what we saw following the market peaks in 2000 and 2008. This has been an interesting indicator to watch in recent months and will certainly continue to bear close watching in the months ahead.”
  • Look at this A hole here
  • What a walk that would be! (not so sure about late night post cocktails though…)
  • I don’t know what’s going on with this quote but I love it.
  • Speaking of housing…great quote hereThis is why I feel so strongly that real estate should be looked at as an asset and not an investment. Unless you’re a professional real estate investor it’s mostly timing or luck that will determine how much money you’ll make over time. Owning a home is also a form of consumption — you’re paying taxes, interest costs, insurance, upkeep and making improvements. And let’s not forget to state the obvious — it’s where you and your family live. It’s more than a mortgage or a sale price. It’s about your neighborhood, your school district and the surrounding community. There’s a certain amount of psychic income that people derive from owning a home that’s hard to put a financial price tag on.”
  • I’m giving up on golf
  • Be positive people...it’s important: “It’s easy to slip into a mindset of fear and worry — where you’re thinking about all the things you DON’T want to happen. But this is such a dangerous path to go down. Like Coach Dungy points out in the above statement, positive thinking doesn’t guarantee you positive results, but negative thinking almost surely guarantees you negative results.”
  • A Dorito Burrito? USA USA USA 

Tonight we are going to end with the worst back flip in the history of back flips. No one fails this hard (and typically lives I guess?)

https://www.youtube.com/watch?v=NAFIOdhDKdY&feature=youtu.be  

Have a good night