(I'd first like to say welcome to our visitors for this weekend's Open House. For new arrivals and long-time subscribers alike, be sure to check in Saturday and Sunday as I'll have several spec names for you to consider. Happy reading!)
Is the smart money too smart?
Beginning Sunday I was bombarded by people far more intelligent and informed than I am about how the plan to tax depositors in Cyprus could be the most important story in ages. In a 24-hour period starting Saturday morning, I received almost hourly bulletins about how deposits are sacrosanct and the precedent of confiscatory taxes in Cyprus meant that individuals all over Europe and perhaps even the United States would be pulling out money from the weak banks, causing the long-awaited collapse of the banking system in Europe and the euro in general.
This was hard for me to grasp. I didn't know Cyprus and I didn't know the impact the country's woes had on us.
I didn't need to worry. Others had summed it up for me. Europe would open down 5% and we would open down 2-3% because this was a VERY IMPORTANT NEGATIVE.
Frankly, I thought this was ridiculous. The market's been incredibly strong, too strong perhaps. It was due for a pullback. This might give you a pullback so you could get in.
My calculus was viewed as naïve and unsophisticated by everyone I chatted with or e-mailed.
Didn't I know how big the banks were in Cyprus, flooded with Russian hot money? Didn't I know that this was Lehman No. 2 because the European authorities, like the American authorities stupidly before them, decided to draw the line to punish the ne'er-do-wells and simply didn't understand the consequences?
I tired of this debate. I tired of it because I understand something the really smart people didn't know. I knew that our market had finally divorced itself from Europe.
First, Europe used to mean a lot to us, even as recently as a year-and-a-half ago. Our banks were their banks. Our companies were their companies. The weak euro would hurt our exports. The litany was cut and dried.
What the REALLY SMART people haven't realized yet is that most financial and industrial companies in America have pulled back or minimized their businesses in Europe because they figured out that they would be punished in the marketplace if they stayed big there.
Second, as stupid and as bungling as the European authorities are, they can read the papers too. They know that the brinksmanship isn't about Europe, it's about a banking system that is much bigger than Cyprus but still much smaller than all of the other hot spots that we have seen in Europe.
Lehman was a surprise on multiple levels. First, it seemed at the moment that Lehman was going down that a Korean institution was going to throw them a lifeline.
Two, Lehman was the biggest bank in the world. That's right, the biggest. We don't talk about it like that, but when you add up all of the accounts that were levered, all the balance-sheet blow-ups and all the false financials that hid bad loans, you had something nobody saw coming.
Maybe nobody saw Cyprus coming here. But they did see it there and the authorities have made a determination that it won't spread to other countries. You may think they can't contain it. But while they should have caught Cyprus a long time ago, we now know they have the means to control things. If they can control gigantic bond markets and get interest rates down from 7% to less than 5% from totally bankrupt countries, they can cordon off Cyprus.
Now here's something that you need to know about next week, based on what happened this week in Cyprus: the same people who are smarter than I am are not going to let this Lehman idea go. They are going to dig in their heels. They are going to try to get people to panic here no matter what. They don't care that we have a strong domestic economy, strong spending and strong housing. They don't care that we have managed to separate ourselves. They want us linked because they sense that they can't take the market down any other way.
After the sequester didn't take us down, after the fiscal cliff debacle didn't take us down, after the tax increase for the wealthy didn't take us down and after the election didn't take us down, they are running out of things to use to knock the market down ... for now.
Don't worry. They will be back with heightened attention to the sequester and what it will mean for unemployment, but they are treading warily because if they come down too hard about how profits are going to fall, they run into the Bernanke buzz saw because he will keep the easy-money spigot going.
So what do you do? How do you make money from this pressure that they will exert on the market next week?
I say when we come in on Monday and we have no real deal or a deal that the people who know more than we do pronounce as bad, we are going to get a chance to buy a couple of high-quality companies at a discount.
I say you go all domestic and you go for our retailers and our financials, the two groups least impacted by Europe and yet two sectors that go down hard with the S&P futures.
The two best?
Next week PVH (PVH) reports and I think that the Street has turned very negative on the company. I suggest you buy PVH calls, specifically the May 100s at $13. PVH reports on Wednesday and it will be able to talk about how the synergies between Warnaco, purchased recently, and PVH are much better than expected and that the Warnaco portion of Calvin Klein -- the part that PVH didn't own -- is going to do much better under PVH than it was under an independent Warnaco.
The increasingly negative analysts don't seem to remember that they got pessimistic ahead of the first time PVH reported after the Tommy Hilfiger purchase. This time I think will be no different.
I suggest the May calls to give the stock time in case there are other worries about the stock market that could bring this wild trader down.
And if you are wary of this one, buy half of a position before and half after, as I think that the analyst community will get positive on the company after it reports even if it doesn't do a terrific number.
The financial I would buy? I think you have to take a big swing at Radian (RDN), the No. 1 mortgage insurer in the country. The housing market, which you are going to hear great things about Tuesday when we get February home sales and the Case-Shiller index report, is going great guns. The consensus right now is that we will build 1 million homes this year. I think that's just too low. I bet it is closer to 1.2 million. The more new homes, the more we have to raise Radian's numbers. Not only that, but the FHA is rapidly pulling away from writing mortgage insurance. Radian's taking up the slack.
So, when the intelligentsia spread the word Monday that the Cyprus "solution is a disaster," you know where to go: PVH calls and Radian common. And remember to buy more PVH after the report recognizing that the analyst community is negative and will get positive the day after the quarter, no matter what number PVH gives us.