The Purloined Letters of this Market

 | Jan 09, 2012 | 3:39 PM EST  | Comments
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Stock quotes in this article:

wfc

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usb

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aapl

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aa

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txn

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qcom

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brcm

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cy

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stx

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wdc

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klac

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AMAT

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jnpr

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jbl

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avt

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nok

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goog

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vz

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MC

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v

You get tech moving, you get banks moving, you get the market moving. We are in a weird juncture when the groups that had been laggards are providing leadership, especially when no one believes the earnings for any of these stocks, other than Wells Fargo (WFC), USBancorp (USB) and Apple (AAPL) will have good quarters.

But that doesn't matter. Expectations are incredibly low for this quarter and I think they will even get lower after Alcoa (AA) reports.

I can't stress the importance of a couple of tech upgrades today because they are so stark and so in opposition to what had been the perceived wisdom for the moment. I am talking about the upgrades of semiconductors from Deutsche Bank and Bank of American Merrill Lynch. The semis are at the heart of what people like to buy when they buy tech. They want to see Texas Instruments (TXN), Qualcomm (QCOM), Cypress (CY) and Broadcom (BRCM) lead the market. You get the SOX umbrella than you can buy the other component companies, like Sandisk (SNDK) the flash company, as well as Seagate (STX) and Western Digital (WDC) which had been hot because Thai flooding has taken out capacity but now have actual demand going in their favor.

You can buy the semiconductor equipment companies, notably, KLA Tencor (KLAC) and perhaps Applied Materials (AMAT). People will want to buy ancillary telco names, stocks like Juniper (JNPR), which is actually running today. They will want to buy the assemblers, where I am talking about Jabil (JBL). They will reach for Avnet (AVT), the tech component supermarket which recently told me that inventories are low and this group is uniquely known as a sector that trades on inventories. When they are lean, pricing goes higher, gross margins get better and earnings for the second half of the year are going to be guided higher even if this quarter goes lower.

And, most important, they ignite Apple, which had an estimate bump from Goldman Sachs this morning a bump that is more of a flag that says "look at me, look at me, I have earning momentum again."

No stock in this country is as important as Apple and there have been issues behind the scenes that have been working in Apple's favor. First, the expectations have been set very low because the last quarter was a disappointment. When was the last time that expectations were low going into this quarter. Second, the iPhoneS4, initially hailed as nothing more than a slightly improved iteration from the previous phone, I mean it wasn't iPhone 5, has turned out to be a huge upside surprise. One of the reasons? Siri. If you haven't tried Siri you are in for a treat. That's the woman in the phone who can run your life. All weekend I spoke to her, often in hushed terms. I told her when to take me to a dinner party on Friday night, give me directions. I told her to wake me Saturday morning. And when I told her that I loved her for doing such a terrific job she admonished me that she hoped I didn't say that to all my mobile phones.

Which brings me to the other mobile phones. What happened to them this quarter? Nokia (NOK) goes out with a windows based phone and nobody seems to care. Smart? The phone, yes, but dumb in terms of trying to compete with Apple.  The new news here when it comes to smart phones is that Google's (GOOG) Android seems to have lost some share to Apple. It is hard to say how much but it's pretty clear that Verizon's (VZ) decision to heavily subsidize the iPhone 4s has mattered and mattered greatly. That plus the news of the iPad 3 on the horizon, a product that seems to have no peer anymore, allows you to make the case that the Apple ecosystem has now extended dominance from the iPod to iTunes to the iPad and perhaps the iPhone. That's so important to a company that is still viewed with skepticism after the death of its founder.

Tech's big in the S&P and it's been absent as a leader, but far more absent has been the bank group as anything but a millstone to the averages. Today, though, with the news that the government's working on a new way to rid itself of home inventory, and the government owns a huge preponderance of homes courtesy bad lending by Fannie and Freddie, plus the possibility that the housing crisis could ebbing, something that Cramer fave Jack Welch talked about this morning, could lead to a continuation of what looked to be a relief rally in the group that might be developing into more than that. Out of deference to the momentarily forgotten European debacle, I will continue to ignore the multinationals. But how can you not consider taking a position in Wells Fargo or USBancorp, two double-digit growers at a time when the group's challenged for revenue growth?

So far the big surprises of 2012 aren't the resurgent industrials as every year starts off with a modicum of outperformance for those stocks as part of a hope springs eternal trade. It's the run in tech, with leadership from Apple and it's the totally counterintuitive trade to buy banks, the last laggard of what otherwise has been a strong financial group led by property casualty insurers and faux techs like Mastercard (MC) and Visa (V).

In fact, the biggest surprise of 2012 could be that the financials, the most hated group out there, can actually soar. If that happens, the leaders, like USB and WFC can really romp, particularly now that the largest market cap bank, and the de facto winner, is WFC. Apple and Wells Fargo, they are the Purloined letters of this market, right in front of you and ready for the grabbing.

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