Bull and Baird Blog - March 10, 2016

Equities start the day higher as Draghi goes ham on stimulus. “Going ham” might be my favorite new way of saying someone “went crazy” so expect to see it a lot going forward, it’s definitely underutilized in financial media. Ok, so what exactly did Super Mario do this morning to get equity markets all fired up? Well, he basically lowered every single interest rate they have, expanded the size of the QE programme (going British there), introduced a new TLTRO (fancy term for refinancing) in which banks can actually get PAID to lend (or, alternatively, pay the ECB to leave the money there. You can’t make this stuff up), and wrapped the whole thing up by saying they will start buying non-financial investment grade corporates. So yea, short of him saying “we are buying crude oil and equities” he basically threw the kitchen sink at this deflation monster. Here’s the problem though, they are kinda all in. What happens if this doesn’t work?  What happens if equity markets move on from chasing this central bank carrot? I don’t know but it would mark a major turning point in worldwide equity market strategy. For years now every time a Central Bank brought out their favorite bazooka we’ve seen equities pop like a kid who ate 28 Sweet-tarts (literally one of the worst candies). Actions like these have been incredibly positive for risk appetites in the past so today’s price action will be a HUGE tell, HUGE.  You might be standing on the doorstep of a world where crazy acronyms and “whatever it takes” doesn’t matter anymore. Is that scary? Honestly…in my opinion…no, not at all. We need to get back to a world that cares less about overnight lending rates and more about corporate cash flows with a multiple attached. Is that too much to ask?

After the open….actually instead of telling you how the market reacted to Draghi let me just show you a picture of the DAX, that should tell you all you need to know. Yep, look at that reaction to kitchen sink stimulus my friends, nothing but down and to the right. I wondered on Twitter last night if expectations for the ECB were too high but you know what?  It turns out they weren’t, it’s just that things are morphing. As 2016 grinds on there is one subject that is becoming rapidly clear:  Central Banks have run out of bullets. Everyone hates negative rates and all these fancy re-financing operations aren’t driving economic activity at all. The Euro had a weird day where it initially sold off vs USD but ended up RALLYING. Why? Because Draghi also said this: "We don't anticipate that it may be necessary to reduce rates further." Even they know there’s no point in going even further to the left of the decimal point. We sold off all morning long and the tone of the equity market has now shifted from “are we going to make another run at the highs” to “l guess that 2,000 level is still stiff resistance”. Can I morph into a range bound bear? Is that a thing? 1850 – 1950 with overshoots in both directions but with a bias geared lower? That’s too complicated isn’t it, man this predictions thing is tough. We bottomed out around lunch and managed to tick higher as Crude reversed. Let us not forget that Crude and SPX love trading with each other so apparently that’s still a thing. Winners CPGX, DG, ESV, NEM, and HPE. Losers WMB, CF, IRM, GME, and LM.  

We went nowhere in the afternoon but did manage to close well off the lows. So, what can we take away from today’s wonky ups and downs? Well 1) we are still churning the high end of the range. Overhead resistance remains firm in the low 2,000s  2) the ECB brought out its dog and pony show and it didn’t help us one bit 3) sentiment has shifted back to neutral, AAII Bulls is back to its “no signal at all” area (37% bulls) 4) defensive stocks are still leading, Telecom and Utilities haven’t faded one bit and 5)  we are going to need an honest to goodness catalyst to go higher, Quantitative Stimulation ain’t gonna get it done anymore.  

Final Score:  Dow -3bps, S&P500 +2bps, Nasdaq -26bps, Rus2k -82bps.

News Highlights:

  • Succinct Summation of the Day’s Events: We may have just witnessed the last stand of Central Bank policymakers using extraordinary measures
  • Quote of the day from Josh (about financial advisors):  “As advisors, our job is to draw the distinction between the true risk – not having enough money to last through retirement – and the fake risk, which is short-term fluctuation in the stock market. It’s not always easy to do, but it is one of our essential functions.”
  • JC says this price action we’ve seen is perfectly normal:  “The S&P500 has struggled over the past week to continue this monster rally from last month’s lows. It should not be a surprise to anyone that we have struggled. Why? Because prices just ran into a ton of overhead supply. This correction is normal, and should be expected” 
  • Looking at sentiment, we are right back to the long term average.
  • Chart of the day is in Housing….what a surge of wealth!!
  • My other chart of the day is this incredible look at the US Economy.   I’ve never seen the super long term chart of Goods Producing vs Service before…just amazing.  Is this what China will look like in a hundred years? 
  • I love how this author talks about the long term outperformance of stocks over bonds.  Genius stuff:  “One of the lessons gleaned from long-term studies is that stocks have historically outperformed bonds. Not necessarily over the course of a year, or even a decade. But over the long run, stocks have beaten bonds.  Why is this? The answer is simple….equity is completely different from other classes of investments. It’s the only one that captures human ingenuity, which is the ultimate asset.”
  • Warm weather brings back romance doesn’t it?
  • If you are a Star Wars nut you owe it to yourself to read this history of the Millenium Falcon.
  • Nice take on the ECB here:  “But the central bank can’t force households and companies to borrow to spend and invest. At the same time, there is a rising chorus of concern—not least at the Bank for International Settlements, the central banks’s central bank—that this whole experiment with negative interest rates is counter-productive. Sweden, Denmark, Switzerland and Japan are also pursuing negative interest rate policies. Negative rates are thought to be damaging to bank business models and profitability, to agents in the loan books of shrinking banks, and to cross-border lending, when the whole idea of unorthodox monetary policies is to get banks to lend.”
  • You know what the remarkable thing about fund flows is?   How little it impacts stock market returns.  It might be completely useless as an indicator. 
  • Two things I think here.  1) how awesome are drones 2) no freaking way

The other day I had a great video of “Near Death Experiences” as filmed by GoPro users. Well, here is volume 2!


Have a good night