A Bizarro-World Market

 | Apr 14, 2014 | 7:53 AM EDT  | Comments
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Stock quotes in this article:

exc

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eix

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nrg

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ctl

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t

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epd

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mwe

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line

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kmp

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bwp

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tex

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joy

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Almost everyone I know has two emotions about this market: They hate it and they fear it.

They hate it because they can't figure it out. They fear it because, if they can't figure it out, then something must be very wrong that they just either can't see or can't get their arms around.

Now, some of this fear comes from the fact that no one I know -- and I've canvassed the best desks -- has a clue why interest rates went down last week on some very strong U.S. data. The only plausible flight-to-quality provokers I heard were as follows:

1. Russia attacking the Ukraine under the premise that "Ukrainian bandits" provoked them;

2. Japan's new taxes could cause a Great Recession; and

3. Something in China is so awry after those pathetic export and import numbers that the country is near a "collapse" to a 5% gross-domestic-product growth level, down from 7%.

Yep, something is happening in each or all three countries that is so scary and frightening that it has some very in-the-know people buying U.S. bonds. Is it flight-to-quality? Or is it that there is no quality anywhere else -- particularly in Europe, which has extremely low rates and less stability -- so the money, in search of a decent yield, comes here?

Among those who are buying bonds, whatever these folks fear, they presumably fear it for a legitimate reason. The money's too big to be a couple of yahoos buying. The usual underlying reason -- the economy is rolling over -- just isn't the case in the U.S. Employment is too strong; sales are too great. We also know Europe is better, not worse. But China, Japan and Russia-Ukraine are all bad and worrisome, and each one could lead to some sort of worldwide slowdown if they get out of hand.

But if that's the case, why is the truly global commodity of oil going up and not down?

It just doesn't make sense that oil is relentless in its advance, especially when many other commodities are being hammered. Oil cuts toward some sort of doomsday scenario involving Russia and a genuine clash with the West. Otherwise there's oil coming out of our ears globally, and the U.S. is importing less and less of it. Again, it just makes no sense, but those oil prices are going to start hurting this country at the retail level if this keeps up.

Now, to stoke the hatred people have for this market, let's break down the micro. The best-performing stocks since the slide began? Hands down, the utilities. OK, I get that: search for yield. But the best-performing utilities? Nope, not the highest dividend yielders, but the ones with the greatest growth, led by Exelon (EXC), Edison International (EIX) and NRG (NRG), all of which have among the lowest yields in the group. That's totally counterintuitive to people who say this move is all about the yield. Again, it's too confusing for most who are trying to figure this moment out.

Two telcos have held up well and are now advancing -- CenturyLink (CTL) and AT&T (T) -- and I believe it's because they yield 6% and 5% respectively. Again, I am willing to call that a thirst for yield.

That thirst is hard to slake. For example, lots of real estate investment trusts, particularly the office-building and retail REITs, have been bid up for their yield. But, as with the utilities, the ones that are still rallying have puny yields -- yet they keep going higher. It's almost as if people say, "I want yield; buy some utilities," and they aren't even realizing they aren't getting good yield anymore.

But some yield is just not considered to be any good. They aren't created equal. Consider the master limited partnerships. These stocks have all been awful except Enterprise Products Partners (EPD), which is the most fully valued and has one of the lowest dividend yields. The higher-yielding ones seem shell-shocked, a result of too many equity offerings -- think Markwest Energy (MWE) -- or too much worry about distribution cuts, as with Linn (LINE) and Kinder Morgan (KMP). While I don't think that will happen, I didn't think that Boardwalk Pipeline (BWP) would slash its distribution, and that has cast a pall over all but EPD and a couple of other pure toll roads with no commodity exposure and plenty of room to grow.

Next bizarre area of strength after the utilities? It's in the polar opposite of the utilities: machinery. I told you this is an exercise in counterintuitive and befuddling logic. Yep, Deere (DE), Terex (TEX), Joy (JOY) and Caterpillar (CAT) are all roaring higher. Again, these are total mixed messages. Sure, some crops are doing well, so Deere can be reconciled in the U.S. But business outside the U.S. is iffy at best. Joy? Coal is horrendous. Sorry, it is simply horrendous. There is no future for coal in this country, even though a short-term and short-lived natural gas spike has caused some switching. The sector is in permanent secular decline and, therefore, so is Joy. Is it selling itself? Perhaps, but after the disastrous Bucyrus buy by Caterpillar, who would be that foolish?

The only explanation? Perhaps Europe needs to stockpile coal because of a Ukrainian war and Russia potentially cutting off oil and gas? Could that be why people are buying Joy?

It wouldn't surprise me, because the best-performing energy stocks, despite the oil spike above $103 per barrel, are the natural gas stocks. This is despite the fact that natural gas prices seem to have peaked. The moves in these -- Southwestern (SWN), Encana (ECA), Ultra (UPL) -- are insane. The only one that's being crushed is the one that had been the favorite for years, Cabot Oil & Gas (COG). I think we are getting this move because people actually believe those companies, with the exception of Cabot, are going to supply the world with natural gas. Cabot can't because its natural gas is spoken for by New England agreements.

Caterpillar? What can I say? It's absurd. But it appears there is not a seller to be found, no matter where this stock trades. It's the same with Terex, which is a poor man's Caterpillar.

Beyond these, there is a scattering of strength in the most boring and old-line of the drug companies, namely in Eli Lilly (LLY) and Merck (MRK), which look like upside-down charts of Gilead (GILD) and Biogen Idec (BIIB).

Kellogg (K) and General Mills (GIS) -- the two food companies with, I think, the least impressive earnings streams right now, save ConAgra (CAG) -- are the market leaders in that segment. I would presume this is yield thirst. Plus, in the case of Merck, you have a potential breakup of the company and a potential hepatitis C pill to rival Gilead.

Shares of Hewlett-Packard (HPQ), Intel (INTC) and EMC (EMC) are all acting terrifically. This seems to indicate a return of servers as a powerful concept in tech even though, frankly, it shouldn't be. A step further: It's absurd and wrong. But it's happening.

What's so unnerving is that almost every single stock that is strong has a company underneath it that isn't really doing well at all.

And the stocks that are doing poorly? They tend to be just nominally attached to the best-performing companies.

Worst-performing stocks and best-performing companies. Best-performing stocks and worst-performing companies.

I see no other way to say it. And explaining it is no different from explaining the strength in the bonds in light of strong economic data. It can't be done with the current information at hand.

Look, maybe there is a giant worst-to-first sea change that's about to occur. Maybe the market has decided to reward poor performers and trash good ones.

Either way, it's very worrisome, because a healthy market rewards the good companies with higher stocks and punishes the bad companies with lower stocks.

But the opposite is happening. For anyone who has been in stocks for a long time as I have been, we know an uncomfortable situation when we see one, and this one is mighty uncomfortable.

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