The Stock Market: What Was, What Is, and What Will Be
Plus, a look at Twitter, Chipotle, and JC Penney.
Good morning from Minyanville East, where I'm settling in after a stretch of some much-needed balance. I was off the grid in Cuba at the end of last week -- someone is going to make a lot of money when the embargo is lifted -- and have been playing 'ketchup' on the tape in my absence.
This is what I've garnered, in no particular order:
Twitter (NYSE:TWTR) priced at $26, opened at $45.10, rallied to $50 in short order, and retreated to close at $41.65. That little birdie is now worth a shade under $24 billion despite not yet earning a profit. I learned long ago not to buy or short on valuation alone, but the numbers are staggering as these things go.
GDP was better, but due to unusually high growth in inventories; and the non-farm payroll data was strong, although the BLS removed furloughed federal government employees from the sample set so it wasn't a "clean" report.
The ECB cut rates, and while a 'surprise,' it was more psychological than structural and begs the question "why" given we're at all-time highs in several major markets.
On Twitter Thursday, the S&P (INDEXSP:.INX) opened 10 points higher and closed 24 points lower, which was a "major daily engulfing candle" that wiped out the prior nine sessions. That pattern gave the bears a leg to stand on -- it typically indicates a change in trend -- but the late-day melt-up on Friday more or less negated that, or so the thinking goes.
With 35 sessions left in the calendar year, the performance anxiety is good and thick. The Dow Jones Industrial Average (INDEXDJX:.DJI) is up 20% for the year, the S&P 500 is 24% higher and Nasdaq (INDEXNASDAQ:.IXIC) is almost 30% above where it started 2013. Those returns are not too shabby and fund managers are on edge, for if they underperform their benchmark, they could be looking for a new job when the ink dries on their year-end letters.
S&P 1730 and NDX 3255 remain important technical support levels for the major averages, and until those are breached, the bulls will buy the dips with reckless abandon. You may not agree with the price action, but you should most certainly respect it; there are a lot of motivated agendas in play, from politicians to policymakers to investors and back. Manage risk rather than chase reward as we together find our way.
What Would Bennet Do?
I've been trading 23 years and have experienced my fair share of drama; I'm not sure I've ever been as exasperated as I was last week prior to my work-related yet enjoyable respite in Cuba.
It wasn't about positioning (my risk has been managed) nor was it any one particular item. It was more of a cumulative sense of financial fatigue and what constitutes news in today's digital age.
Last week, the biggest story making the rounds was that Goldman (NYSE:GS) economist Jan Hatzius suggested that the Fed will lower the level at which it would begin to hike rates when it meets in March. He believed the Fed will lower the employment threshold from 6.5% to 6.0%, which is effectively "easing," if such a thing is possible given the Zero Interest Rate Policy, or ZIRP.
Taken in isolation, you may have wondered, "What's the big deal?" When viewed in the context of $5 trillion of quantitative easing -- and the increasing likelihood that the Federal Reserve will try to make all that inventory magically disappear -- the imagery of officials moving the goalpost off the field, through the stands, and toward the other side of the parking lot -- until such time the bears threaten to score -- comes to mind.
I'm all for making money -- I love it, actually -- and I get that there are structural imbalances in the system that need to be addressed or otherwise rectified. What is maddening, at least to a card-carrying free-market capitalist, is that the rules of engagement continue to change in the midst of the game. And I use that term loosely -- this is anything but a game.
The stock market is at all-time highs. Traders who broke the law have been tarred, feathered, and altogether hung in the public court of opinion. Credit markets are greased to the gills as corporations lock rates in for 50 years into the future. It's Kumbaya, Festivus, and Woodstock rolled into one, with little if any semblance of perceived risk.
I hearken back to six years ago, when Bennet Sedacca and I dove deep into the topic of moral hazard. I think of Bennet often, wondering what he would say if he was around to witness the current day. We are lucky to channel him through his son Michael, who is a chip off the old block, but Bennet had a gruff honesty to him that cannot be replicated. I often ask myself, "What would Bennet Do?"
That question will remain unanswered, but we can glean wisdom from his musings, one of which is that "bailouts delay 'Social Darwinism' and the natural business cycle, and artificially delaying the cycle will create a more horrific final event." This is a concept I have written about extensively and believe in my core; it's also one that has cost me great opportunity and provided a fair share of humility.
I don't how long 'this' will last (or how we've come so far, so fast) but unless everything we've ever learned about the business cycle -- or cycles in general -- can be erased... unless the laws of motion are being rewritten before our very eyes... we must see the other side and prepare in kind. A rising tide, in addition to lifting all boats, has the potential to create a very damaging tsunami.
Food for thought on a Monday -- and I know, it won't matter until it does. In the meantime, I'll share some Random Thoughts for your consideration:
How in the world does Chipolte Mexican Grill (NYSE:CMG) have a $16 billion market cap in an efficient market?
Can we agree that crude $50 is a lot more problematic than crude $150?
Do JC Penney (NYSE:JCP) and BlackBerry (NASDAQ:BBRY) get interesting on the long side into year-end as funds purge them from their sheets?
I mean, didn't bulls make money buying BlackBerry on 12/31 the last five years, if only for a trade?
Or can the same be said about most stocks?
Did Bill Ackman do his Herbalife (NYSE:HLF) stock replacement (on the short side) to free up capital? Why else would he assume so much theta?
Randolph and Mortimer Duke used to debate the bigger influence: genetics or environment. No such discussion is needed on Wall Street -- the bulls are higher and the bears are lower.
- One step at a time; the trick is to enjoy it.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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