Bull and Baird Blog – June 28, 2016

Equities start the day higher as the great Brexit bounce is upon us. So I have to apologize to you my fine readers for not writing lately, I’ve been way too consumed with the misery that a single vote thrust upon us. Now I don’t have any wisdom to convey around this event, I wish I did. I don’t have a PhD in Geopolitics and I can’t pretend to know what’s going on in the minds of my friends across the pond. The people of the UK have decided that their future will not involve the EU and that’s fine, they have the right to do that, it is a democracy after all. What we as capital market participants have to do though is deal with the fallout, the repercussions, the wreckage. The biggest problem I have with this event isn’t that it came out of left field, or that I was on the side of Bremain, or that this is some “nuclear bomb” none of us were prepared for, no, the biggest issue as I see it is that animal spirits have just been slaughtered. Any chance the global economy had of finally breaking out of this malaise has been pushed back months if not years. Think about it like this: the US Economy is a giant 747 sitting at the end of a runway. It revs its engines, roars down the runway ready to take us on a glorious vacation to prosperity but then something goes wrong and it never takes off. The engines wind down, we reach the end of the asphalt, turn around and try again. Brexit just blew out an engine, flat out destroyed it. Can we call the fine people at General Electric or Rolls Royce and get another one? Sure, but that’s going to take time because engines are hard to build. Confidence here and abroad will be shaken for a while and there’s nothing we can do about it. Animal spirits are back in their holes, worried, hunkering down. Let’s hope they come out again soon because the world desperately needs their love.

After the open we got a textbook “the market has been pounded for 5% the past two days let’s see if we can bounce it” type of a rally. I hate those kinds of moves though, they never mark the end of a panicky stretch. When waterfall declines and uncertainty grip the tape you want to walk in to futures down huge with news headlines about redemptions and recessions and the end of the bull market. That’s how near term bottoms are made, not on these “oh I hope all that selling is done because I’m going to dabble here” 1% wishy washy rallies. Bonds didn’t exactly cooperate either, 10yr UST hovered around 1.45% most of the day and if this puking was truly at an end I’d expect to see yields a bit higher. We got a couple of economic data points in Consumer Confidence and the third look at 1st Quarter GDP (do we really need 3 revisions on this?) but they didn’t move the needle at all, nothing does when headlines roar. Energy, Financials, and Tech led because they’ve been beaten down the most. Names like SWN, MRO, COG, C, BAC, and WFC stopped going down for at least one day. Losers were DOW, DD, HRL, RTN, and TSN but there was no rhyme or reason there (Dow did cut a bunch of jobs). By lunch we had managed to recover the 200 day MAVG (2,022) but it felt as flimsy as my commitment to spinning classes. 

The rest of the day was up and to the right and by the time the bell rang we managed to close on the highs!  2,036, up 1.78%! You know what…that’s not a bad day at all. But…but….we aren’t out of the woods yet. Tomorrow will be incredibly important because it will let us know whether today was just short covering or the beginning of the end for Brexit worries. Will Brexit sit next to Ebola and the Debt Ceiling or will it take its spot next to Lehman or LTCM? Time will tell but I think the former is more likely than the latter. Still, new highs seem so far away. Now it looks like they won’t be here to stay. Oh I believe…in yesterday. 

Final Score:  Dow +157bps, S&P500 +178bps, Nasdaq +212bps, Rus2k +162bps.

Volume was high. Our desk was better to sell. Buying in Media and Retail. Selling in Drugs and Financials. Shorting in Materials. News Highlights:

  • Succinct Summation of the Day’s Events: A decent bounce because the market has been smoked the past few days. It happens…this kind of price action is to be expected after a macro shock.
  • This is a hot take right here, I like it: Every financial crisis is different. Because of that, we cannot apply lessons from the past to learn about the future. Nor we can look to those who made the right call last time. There's nothing to do, logically, but to trudge along as always, on the logic that the markets go up more than they do down and that, without the benefit of hindsight, we cannot know which investment expert will be correct about this particular crisis.
  • Put this link in your “what is my growth thesis 5 years” out folder: Here is a table showing the ten most common ages in 2010, 2015, 2020, and 2030. By 2015 the millennials are taking over. And by 2020, the boomers are off the list. My view is this is positive for both housing and the economy, especially in the 2020s.
  • Ben Carlson did a deeper dive here: “If demographics are destiny in the markets and the economy then it definitely makes sense to pay attention to the baby boomers as they hit retirement age. But don’t forget that the millennials are coming to pick up some of the slack. The 2020s could be an interesting decade in terms of housing demand and spending from the new biggest generation”.
  • Something to ponder if you like to be contrarian: “Things are bad in Europe right now. This isn’t the kind of thing that’s going to get solved overnight. There’s political uncertainty, poor demographics, non-existent economic growth, negative interest rates and the list could go on and on. Maybe one of the best reasons to invest in European stocks right now is the fact that there are so few good reasons to invest in European stocks right now.”
  • Things you don’t want to see after landing
  • What is about pools that make people do stupid stuff?
  • You know Pakistan looks pretty amazing to hike. But…I mean…
  • So this right here is an amazing patio right? That being said, all I can think of is how wet those pillows would be once my kids got done swimming.
  • These guys climbed the Eiffel Tower. From the outside….
  • What an awesome quote

We’ll end tonight with a solid Fail video that REALLY picks up around the 2 min mark. It also has the worst hurdler of all time in it. Don’t miss this one! 

https://www.youtube.com/watch?v=JFO7YIK79So

Have a good night