An Armful of Non-Negatives

 | Apr 23, 2014 | 1:38 PM EDT  | Comments
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Sometimes, even on these not-so-vicious down days, it is worth asking: Why isn't the selling more pronounced? How can the Dow Jones Industrial Average have gone from 16,026 a dozen days ago to 16,500 without having taken a pause? How can things be that good?

Isn't that the most salient question?

I think it comes down to a simple truism: The things that are supposed to be go wrong aren't going wrong, or they self-correct -- and we then the stocks just plow forward.

So, in the interest of explaining the streak higher, let's just tick down what hasn't gone wrong and what's adjusting to the new realities behind the scenes -- factors that have made it so the market is just much more resilient than one could expect.

First, we've got a huge non-negative that is causing a giant bid to be put under the market, meaning there are buyers that have no choice but to come in and buy a dip. The secret positive? The Fed and the taper.

For the better part of the last four years investors, and particularly hedge funds, have feared what would happen when the Federal Reserve finished its bond-buying program. But, as my friend and writing colleague Matt Horween pointed out to me this morning, the Fed has been tapering on a methodical basis, and this hasn't caused interest rates to rise one bit. Wasn't that the looming sword of Damocles over the market? Didn't fear of the taper cause a tremendous amount of pressure over and over? Wasn't it used endlessly as a reason not to buy stocks or to sell them on any strength?

Now look at interest rates. They stubbornly refuse to go higher. We are in an incredibly Fed-friendly place: The more tapering it does, perhaps the better, as so many people have refinanced and so many companies have locked in low rates that it is simply time for rates to inch higher, if they can do so at all. You can say the Fed got lucky. Consider that Portugal just sold 10-year sovereign bonds with a rate of 3.5%. Which would you rather have? A 10-year U.S. Treasury yielding 2.7%, or a 3.5% piece of paper from a country that we thought was going to default on its obligations less than three years ago?

Taper's been a victory. It was supposed to be a defeat.

Second: This was the quarter when we were supposed to see more of the same. More cost-cutting and firing. More buying-back of stock to make the numbers. We were not supposed to see revenue growth. That's proving to not be the case. The opposite is playing out. We are seeing very big revenue growth at Boeing (BA), Delta (DAL), United Technologies (UTX), Wells Fargo (WFC), Alcoa (AA) and American Express (AXP), Netflix (NFLX), Coca-Cola (KO) and General Electric (GE). Against those we have very few companies without real good revenue growth. IBM (IBM) didn't have it for certain, but I think it will come in the second half of the year. JPMorgan Chase (JPM) didn't, either, but I think that can correct.

It's ironic, but among some of the stocks that are down, it isn't because of slower revenue. AT&T (T), Chipotle (CMG), Yum! Brands (YUM) and Brinker (EAT) all had very good revenue growth. But their costs weren't in control. AT&T may have to spend too much on its build-out and subsidies. Chipotle, Yum and Brinker all ran into higher food costs -- something I should have known from the Guacapocalypse at Bar San Miguel, the restaurant I co-own in Brooklyn!

Third, there's always some group working that seems to save the day. In a difficult market, we typically get these huge moves against all stocks, and we saw that leading into the bottom on April 11. Since then we have seen some real weakness in certain sectors, but these groups have been spread out and they just haven't sunk the market. Meanwhile, the sectors that should have pulled us down -- the highly valued tech and biotech names -- have been going down but in an orderly way. Of course, if you own them you may not think of it in that manner.

For example, I can't tell you how many times the transports have saved the day, whether it's thanks to the rails or the trucks or, today, the airlines. The oils have been tremendous when it comes to their role in keeping the market higher, as there are some very high-profile large-cap oil companies that just don't quit. Or just when you think that retail's rolling over because of a weak number from Bed Bath & Beyond (BBBY) or Macy's (M) or Gap (GPS), you get an upgrade for Home Depot (HD) or a run-up in Michael Kors (KORS). Oh, and have you noticed Wal-Mart (WMT) and Target (TGT)? They are rocks of Gibraltar, very big rocks of Gibraltar.

You think that the weakest stock in the Dow, Boeing, is going to crush aerospace and you fear it -- and then, bingo, the company reports a terrific number.

At the same time the overvalued stocks -- and I mean the stocks that are being valued at multiples to sales or enterprise values, rather than to earnings -- are rolling over again. Before April 11 it was a negative that they were being crushed. Now, though, as the air is taken out of this bubble with multiple-day declines in software-as-a-service stocks, the most overvalued section of the market, we say: "Phew, this market isn't like 2000, when these stocks caused everything to go down." That's because, by the way, there are two kinds of tech stocks -- the ones that sell at 12x earnings and the ones that sell at 12x sales -- and the latter is not bringing own the former.

Plus, the disappointment in Google (GOOG) last week and in VMware (VMW) today just hasn't caused the collapse we would expect in their cohort, in part because these stocks are viewed as one-off misses. There's just no pin action in whole parts of tech.

The biotech bubble threatened to be a real Hindenberg, but then Gilead (GILD) ended up reporting a great number, even with all of the caveats over the cost of its hepatitis C drug. Valeant (VRX), meanwhile, teamed up with hedge fund manager Bill Ackman to buy Allergan (AGN), making for some interesting speculation for those biotechs that have come down and come down hard. That last one was like an angel reaching out to stem a true blow-off.

Even the initial-public-offering market, which had threatened to pull down the entire edifice with the massive supply, has tapered off. That doesn't mean the most overvalued stocks are out of the insider-selling morass. FireEye (FEYE), the poster boy for insider selling, has been cut in half because of two secondary offerings -- a 14-million-share secondary priced at $82 soon after it spiked to $96, and now a 13-million-share deal that's awaiting pricing somewhere in the $40s. FireEye reinforces the idea that there's no level people at which won't sell these expensive stocks. That's crushing the group today.

Or we get a group that simply doesn't go down purely because it is cheap. The bank stocks, even the bad ones like JPMorgan, either went higher or dropped and then stabilized. These are now value stocks that await higher interest rates to send them up. With the new leadership from Wells Fargo, these shares have been lifting slowly but surely pretty much every day since the bottom. It is amazing that JPMorgan couldn't pull this group down. Again, though, we just aren't witnessing the negative pin action that we had been used to seeing as we headed into this earnings season.

Finally, when we do get mediocre numbers from big-cap stocks such as McDonald's (MCD), Procter & Gamble (PG) or Kimberly-Clark (KMB) or AT&T, the bond-market cushion kicks in because of their terrific dividends. They are much better to own than Treasuries, be they ours or Portugal's.

So the answer is simple to why the market isn't getting killed when it should: Too many bad things aren't happening, and those things that are bad don't spill over to what is good. It seems soporific, but that's how things are playing out, and that amounts to a very benign environment just when you would expect the opposite, especially after a huge run.

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