We Take A Pause On The Highs
Equities start the day slightly lower as we take a pause on the highs. After the bell on Friday, our boy Hilsy from the WSJ dropped a “the Fed is talking hawkish” story on us and if the market drops this week everyone will blame him. Make no mistake, the bearish case now TOTALLY revolves around less QE so they will almost certainly dance around their fire and beat the drums of “this will all end badly” in the near future. Other than that article there was zero news last week. In fact I haven’t seen such a dead week in a long time. If I had learned that Muncie Indiana ran out of Cheetos last Wednesday I would’ve written about it, but since they didn’t I couldn’t muster up a recap for 5 straight sessions. Painful. It’s like the macro Gods decided that May 6 – 10, 2013 would be a week of vapor. So here we are, still sitting at the highs, and I’d like to point you to this chart to reinforce the fact that the pain trade is still up. What is it? It’s the % of US Adults invested in the stock market, and it’s at its lowest level since 1998. Now there are dozens of reasons why this chart is so ugly (unemployment is likely the main driver), and after the tech bubble and the credit bubble there may be a generation of people who NEVER return to stocks. But the fact remains that a large % of people aren’t participating in this rally, so when you hear market pundits drone on about “too many bulls,” keep in this in mind. Anyway, let’s see what kind of action we got today.
After the open, we wiped out the early morning losses on the back of a better than expected retail sales report but no one on the planet had a better day than Elon Musk. TSLA continued its amazing 3 day run ripping shorts for another 14% and in even muskier news his stake in SCTY (just over a quarter of the company) rose a whopping 24%! In fact solar stocks in general had a solid day with names like FSLR, SPWR, YGE, and JASO all up a fair amount. The weird thing is if these companies were headquartered in the Midwest they’d likely be struggling. Why? Because the sun doesn’t exist here, it was 38 degrees when I drove into work….on May 13. Tell mewhy people live in the North Central part of this great nation? Unfortunately for us, and my ability to entertain you, the market settled in on unchanged for the rest of the day. I was SO hoping we’d get something new to talk about but alas poor Yorick, even I can’t make this skull dance. By lunch we sat on 1,632, down a whopping point, but at least that Hilsy article appears to have had minimal damage.
The rest of the day brought nothing new and we closed right where we were at lunch, 1,633, unch on the day! May price action…FEEL IT!!! Anyway, I ran across some wonderful thoughts from @mark_dow on Twitter so I’m going to give him the finish tonight (follow him too): “US growth will still be anemic—structural/latent globalization issues will keep a lid on US wage growth, but too many ppl are too deeply pessimistic and are hanging their hats on the Fed blowing things up because all their there theses have been wrong. It’s like at the end of the football game and the team is betting everything on the long pass (the Hail Mary play) because they are so far behind in the score.” He’s exactly right. When the bear case revolves around some magical event that MAY happen sometime in the future and no one knows WHAT the reaction of the market will be…you know they are lost. Stick with what’s been working, why fight the trend? Final Score: Dow -18bps, S&P500 FLAT, Nasdaq +4bps, Rus2k -14bps.
- Today’s must read is from Josh Brown, Please go take it all in. He ponders the Fed and what its exit might mean. “My final point: You may think of this as the end of QE but many of us, those with multi-decade time horizons and big dreams for the future, will instead be thinking of this as the beginning of something else. Just as T.S. Eliot would along with all the other bright-eyed opportunists throughout history. "The end is where we start from."
- The Nikkei is up 42% this year, an incredible move. But before we start calling it the greatest trade ever let’s look at the past few decades and see if this kind of bounce has happened before. Yep..sure has.
- Eye opening thoughts on High Yield here: “The average annual credit loss in high yield bond portfolios was 2.65% between 1992 and 2011. During that same time period, your average yield for taking that credit risk was 10.25% and your average option adjusted spread was 5.7%. Today, that total yield has dropped to 4.96%. At 4.96% you are picking up 4.04% above a comparable tenor in US treasuries. With a 2.65% average credit loss, you are expecting a 1.39% risk premium for taking on junk credit risk if we experience historical average credit losses.”
- Even MORE eye opening thoughts on High Yield here: Yields are so low, in fact, that five years ago the yield on the 10-Year US Treasury was higher than the current yield on junk bonds
- You know what they need on this? A roller skating rink. Or a soccer pitch. Or maybe a home with balloons coming out of the chimney.
- Look at the sector rotation from Apr 16, 2013 to May 10, 2013. Hard to argue this isn’t a good thing.
- The author of this article thinks worries about “Fed Tightening” are overdone: “Just an eyeball look at past behavior suggests that equities are mostly flat in the initial stages of monetary tightening, and rise in later stages. Generally at least two years before the Fed inverts the yield curve and triggers recession. In addition, we are not expecting the Fed to begin raising rates until late 2014 or 2015. So policy is likely to remain supportive for what, at least three or four more years?”
- My moment of inspiration for you
- We’ll end tonight with one of those fancy Graduation speeches that are all the rage this time of year. It’s a 7 minute video but quite thought provoking, so give it a chance. It’s got 4 mil views on Youtube in just over a week, that’s not too shabby.
Have a good night.