Can We Have It Both Ways?

 | Apr 14, 2014 | 2:01 PM EDT
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Can value and growth co-exist? Is it possible that stocks that are reasonably priced can rally at the same time that the high fliers resume their growth trajectory?

Today the answer is "yes," and I think that's the case because the cheapest segment of the market rallied simultaneously with the most expensive segments, the techs and biotechs.

This market's been struggling in large part because the largest part of the market, the financials, has been hellish. Every single part of the financial market -- the credit cards, the banks, the brokers, the insurers -- have been just awful. But today we saw a confluence of events that gave other sectors a blueprint out how to break the morass.

First, we go the mother's milk of any rally: mergers and acquisitions. Everyone knows there are way too many players in the finance space. That's why it was darned exciting to see Aspen Insurance Holdings (AHL) get a takeover bid from Endurance Specialty (ENH), another reinsurer. This on the same day that a gigantic money manager, TIAA Cref, announced the $6.5 billion acquisition of Nuveen, the most famous of the municipal bond houses.

Put aside, if you will, the fact that you most likely haven't heard of any of these companies. What matters is capacity, or, more importantly, the take out of capacity in order to get rid of price-discounting that makes it so earnings estimates go higher not lower. Think back to one of my favorite groups, the airlines. I hated the group for 30 years because there was so much competition. But when the Obama administration allowed some big mergers, that took out capacity and allowed for prices to increase. That's what could happen if we get a beginning of a wave of takeovers. The Aspen deal is hostile, which means that someone might come to its aid. The Nuveen deal shows that someone thinks there is life in the moribund municipal bond market, which had been a black hole.

Speaking of black holes, two favorite pseudo-financials that have pulled down the sector, MasterCard (MA) and Visa (V), actually rallied today on an upgrade, for MA, and a reiteration, for V, from the research team at Baird, a terrific brokerage house. Visa's a huge Dow stock and it has been on pretty much a one-way trip down ever since MasterCard reported its first weak quarter that I can recall. These two stocks had become financial names to hide in, but the weakness in MasterCard's quarter boded poorly for both as well as Capital One (COF). This upgrade resonated, taking many a credit card issuer with it.

But the biggest deal came from a very solid quarter from a least-expected quarter: Citigroup (C). Here's a bank that just got rejected by the authorities for its plans to return capital including dividends and buybacks. Yet the reported numbers were so good that you have to believe this one can get approval at least some day, even as it might be down because of regulatory worries. It sure wasn't capital worries as it's got oodles of it. Citigroup has loan growth, plus 7%, and a rapidly-improving balance sheet and I really like what I heard.

When you see this sector, which has been such a downer, come back to life, it says that perhaps other areas of the market can do so, too.

What other areas?

How about oil and gas? The group's been hanging in because the price of crude's been stubbornly high. But remember people want reserve growth. Today we are witnessing the power of reserve growth as Goodrich Petroleum (GDP) struck pay dirt in a Louisiana and Mississippi with some just-drilled wells. That's caused a 32% run in the stock. It also caused people to scramble for more plays in the group and they found some of my faves and are piling into them, like Pioneer (PXD), which is rallying three points and Sanchez (SN), up almost 5%. Nice to see little Halcon (HK) rally 10%, too.

I have been waiting for this group to reignite, but it's been the majors that have been leading. Given the plethora of companies that trade, this move's very welcome. Any finds aren't just good news for the oils themselves, but for the service players, too. So, two of my other faves, Baker Hughes (BHI) and Halliburton (HAL) erupted higher, too.

Finally, we got a bounce in the cohort that's been most dinged, the Netflix (NFLX), (AMZN), Tesla (TSLA), Twitter (TWTR) segment, the stocks that represent the proxies for what people like. Lots of older professionals hated the fact that for years, newbies bought shares in the stocks they liked without regard to earnings per share. People like Amazon's delivery service and Amazon Prime, so why not buy some Amazon, too? I always thought that if Amazon could print out stock certificates, people would actually order them, perhaps framed, and put them right up on the wall. Shares that are framed don't get sold. Clearly not enough of them are being framed now as the stock is down 20% in part because of weakness from the last quarter, but also because this kind of stock has gone out of vogue in favor of the old-fashioned tech stocks that are dirt cheap historically. A new phone's spiking interest, but it is, in the end, an earnings story -- or lack thereof, or course, and there's no action on that front until April 24.

Netflix, down 10% for the year, is no bargain and it's been silent on the release front. This one trades on signups, not earnings, and, again, that's become a frowned-upon metric.

Who the heck knows what's happening with Tesla? It's tough to sell cars when you aren't allowed to and I have always felt that Tesla's a stock that gets bought on a test drive. The stock's still up 35% for the year, but it's the precipitous decline from the high, more than 65 points, that must be arrested and that's happening today.

Finally there's Twitter. We got a hopeful sign today that insiders won't be bailing anytime soon. They actually put out a no-sale release, which is certainly a nice change of pace from an insider sale filing.

Are these enough to turn things around? No, but we had good economic news, strong retail sales and, thank heavens, interest rates are going higher. I can't tell you how many people are uncomfortable with rates going lower because that means someone big thinks there will be a Russia-Ukraine war, a Chinese recession or a Japanese depression.

And we have a parade of earnings to deal with. So far, we're three for four with major earnings numbers, Citigroup, Alcoa (AA) and Wells Fargo (WFC) to the good and JPMorgan (JPM) to the bad. You keep that ratio and the rally's got legs, even with bonds going higher.

It's too early to tell right now.

But people got so negative and so many shorts were put on, the chance of a rally, whether to sell into or not, is certainly a distinct possibility.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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