The Seven-Sided Market

 | Apr 21, 2014 | 4:00 PM EDT
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It's not just Zillow (Z) that's putting in a good show today. We are also seeing some lift from longtime sufferer Gilead (GILD), with chatter that its hepatitis C formulation, Sovaldi, is selling better than expected. That's helping the biotechs -- as is Sarepta (SRPT) -- in the same way that Zillow and Facebook (FB) are helping the cloud/social/mobile plays.

There's a big debate about whether this market wants value or growth, and while I welcome the debate, I wonder whether it frames the picture correctly. I believe this market has not one, not two, not three, not ever four or five but seven warring factions:

  1. Dividend equivalents (utilities, real estate investment trusts (REITs), Clorox (CLX), Merck (MRK) and, yes, Intel (INTC)).

  2. Senior growth (Starbucks (SBUX), Nike (NKE), Michael Kors (KORS)).

  3. Industrials, transports and aerospace (Boeing (BA), Honeywell International (HON), Caterpillar (CAT), 3M (MMM), Union Pacific (UNP)).

  4. Oil and gas -- these are big enough these days to matter.

  5. Biotechs (with and without earnings plus IPOs).

  6. High price-to-sales techs and IPOs, especially software-as-a-service cloud plays.

  7. International and regional banks.

Within these groups, you have the bond equivalents trading with lower rates, something that makes every group go down, save those dividend-payers and, to a lesser extent, oil if the dollar is going down simultaneously. You have everything else getting hammered unless the rates go higher.

Now if you puzzle this out, it makes no sense except when you think of supply and demand and the customers for it. Of course, if rates go down, you should want to be in the highest growth cohorts, namely, biotech and SAAS cloud/Internet. But it has been the opposite, and while I feel I am a lonely voice in the wilderness, that's because of supply. We have too many of those and too much insider selling, and the FireEye (FEYE)-Splunk (SPLK) situation isn't going to get any better (see my first piece of the day). Google (GOOGL) made this group sinful. Perhaps Netflix (NFLX) can save it. Or Facebook (FB) later this week.

Biotech needs leadership, and both Celgene (CELG) and Gilead (GILD) have patent and competition issues, so they go up one day and down the other.

The senior growth stocks should be doing reasonably well in a low-growth environment, but the Achilles heels are everywhere: Chipotle Mexican Grill (CMG) and Starbucks with raw costs, Nike (NKE) with cloudy outlook, Kors with a bear case traced out by Herb Greenberg's Reality Check newsletter.

The difficulty here is, how do you view healthcare in the senior growth prism? The HMOs are now suspect, and they can threaten their whole cohort -- see Express Scripts (ESRX). Merck (MRK) and Pfizer (PFE) have devolved into special situations. We need to see more earnings to be sure.

The oils keep going higher, but they are starting to affect retail at the pump. But keep this in mind, some of these, such as Baker Hughes (BHI), Core Laboratories (CLB), Schlumberger (SLB) and EOG (EOG) and Pioneer (PXD) can seem to do no wrong. No one knows what to do with the retailers because of gasoline. We have a long time before we see earnings.

The industrials are guesswork because they are about to report. From the looks of things, General Electric (GE) says they will do well, and they are the "value" stocks people point to, but if you look at their multiples, they are anything but value.

The banks are about meddlesome government versus non-meddlesome government as well as net interest margin concerns. Goldman Sachs (GS) goes down after a blowout quarter because it talks about the Volcker Rule extensively on an upside-surprise call. I wanted to slit my wrists after listening to it. JPMorgan (JPM) is a suicide mission. But Wells Fargo (WFC) and Morgan Stanley (MS) are regarded as off to the races, and who knows what to do with Citigroup (C) because it was good but it is still a ward of the state? Let the bonds tell you what to do.

All of these factions do battle every day under the rubric of value vs. growth. It has almost become the farcical risk-on/risk-off that the traders talked about. The height of that folly was when they actually created ETFs about it!

Of course, there are outliers. There is the push-me-pull-you of Apple (AAPL). There are special situations like Snap-On (SNA). There are defiers of cohorts, like Zillow. But in the end, these seven camps, not the two we are considering, determine the action. Believe me, if it were just value over growth, it wouldn't be so tortured.

Because we are in earnings season, each reported stock can move the cohort. However, the crosscurrents are vicious enough that they can reverse on a dime.

My point: Beware of over-simplifying the situation. You will get hurt if you do. 

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