The Day Ahead: How to be a Baby Bull

 | May 02, 2012 | 8:30 AM EDT  | Comments
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Today I would like to place a new phrase into active use: baby bull. Sounds kind of cute, doesn't it?

The baby bull (#BabyBull so deserves to trend) encompasses all of the basic characteristics of, well, a human baby. It's adventurous yet shy, it smiles at those around it to go with the flow but it really is cursing at those talking an alien language. In my single fella view, there were baby bull sightings in the market a week ago and those fresh faces to the scene have packed on a few pounds in the first two trading sessions of this week by feeding on very specific formula, supplied by Mother Macro.

To be a baby bull is to be a stock picker (or as I have characterized it, assuming calculated risks), but also having the wherewithal to learn and appreciate new things as they are being heaved your way day in and day out. 

Defending Your Baby Bull Status

Defending this position among a hungry group of predators, aptly named baby bears, is tough if you don't a strong enough frame to fend off those less-than-friendly animals. Here is how to do it.

Respect the arrival of the abnormal. Private equity spent roughly $405 billion in 2006 and $381 billion in 2007 to buy out firms. Since then, according to research shop Dealogic, $100 billion a year has been allocated. Honestly, I almost forgot that private equity was a force to be reckoned with in terms of shaking the bears out of the mix, as activity has largely been out of the headlines. I continue to hold the opinion that deal activity is poised to pick up in 2012 due to what I call a win/win election scenario:

  1. Buy a business now prior to a Romney win and watch it flourish until it's time for a new IPO during his reelection campaign, based on the promise that a Republican leans towards lighter regulations.
  2. Buy a business now as Obama is likely to win anyway, and in doing so grow the portfolio with profitable entities that could outperform in a continuation of stricter regulations and higher taxes. 

At the very least, with some Federal Reserve members squawking that low interest rates for long is an on-paper-only initiative designed to inflate risk assets today and hikes will have to begin in 2013 to keep inflation expectations anchored, private equity has to be burning the midnight oil studying possible targets. Furthermore, private equity runs the risk of companies re-leveraging their balance sheets with debt to bathe in the low-interest-rate environment, applying those funds to buy back stock or do special dividends. Private equity has to strike in order to obtain the cleanest possible post-recession balance sheets to fund global expansion and technology investments. 

Any signs of this occurring yet? Yup, as P.F. Chang's (PFCB), Charming Shoppes (CHRS), and Collective Brands (PSS) will attest.

Fight the baby bears with sharp facts. There are emerging, justifiable macro-related positives (can't all be weather) for the baby bulls to cling onto, most importantly as it pertains to the thinly-discussed second quarter for many companies. They include:

  • April ISM-manufacturing. Not a ton of dialogue on the components to this better-than-expected report yesterday, but I will point to these:
  1. Production being ramped up at a faster pace strikes me, as phones are still ringing to place orders.
  2. Transportation equipment said to be experiencing "stronger stability in overall environment," a tie into corporate confidence as capex plans are executed upon.
  3. "(V)ery positive outlook for commercial metals" cited, bolting on well to China's PMI numbers and perhaps, suggesting the post earnings pullback in Caterpillar (CAT) is a bit overdone.
  4. The employment reading was high quality as only less-headline-worthy industries noted declines (sentiment looked to be strong employment component on ISM-manufacturing, low market expectations on Friday jobs numbers).
  • Stock movements. Key financials, JPMorgan (JPM) and Wells Fargo (WFC) seem to be clicking a little, while those names leveraged to a homebuilder recovery remain on fire.

For now, I will act like a baby bull in search of favorable risk reward scenarios, the latest being the pre-earnings call on G&K Services (GKSR). Part of being a baby bull is adapting to one's surroundings. Keep that in mind as we approach Friday and the ensuing long weekend reads on the employment numbers.

Watch:

  • How S&P financials, industrials and materials end the week. These were the sector laggards in April.

Bone toss to the bears:

  • S&P 500 ETF has not yet closed above its April 2 intraday high.
  • I am starting to hear inflation shout-outs in macro and earnings reports (the dreaded "lag" on display?). Should demand moderate, inflation has the potential to linger and bite into profit margins.

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