The Blueprints for this Market (Part 5)

 | Apr 28, 2014 | 4:00 PM EDT
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When it gets as bad as it is now, we tend not to even care if a company is profitable. It's like 2000. We want to shoot first and ask questions later. That's the quandary of Facebook. If you look at Facebook in a vacuum and value the stock on its out years, which is what you have to do when the highest momentum plays (and it is one), you can see that this stock is probably selling at about 20x 2016 numbers. For the No. 1 large-cap growth story of the era, that's rather remarkable. It's actually cheap. But it doesn't matter now. It is in the grip. The stock went up after hours because it was every bit as better than expected that you can get on every line. But that kiss-of-death pirouette brought out sellers and that was all she wrote. You can tell that locked-up insiders at other tech companies took one look at a company that blew away the earnings estimates, not the sales estimates or the order estimates, and said, "I want to be short a basket of like-minded software-as-a-service or Internet social mobile stocks because if Facebook didn't go higher, my joke of a stock won't."

That's what's going on right now. I don't know what turns it around in the near term. It's tough. Twitter's (TWTR) on the horizon and unless it has a miracle profit or a statement that insiders aren't selling, it could be the cause of still one more industry downdraft.

Of course, this process is also extended to the biotechs. Just as I wrote in Real Money about tech, the same thing has happened in biotech, where the real miasma of deals has occurred. There are literally dozens of these early-stage one-to-two-trick ponies littering the market and every one of them is going down. They were hurting for a long time, victims of way too much supply, but the coup de grace was Gilead (GILD), which, like Facebook, reported an amazing quarter that caused huge number bumps and, again, the stock gapped up and did the signature pirouette of all tops.

There are biotechs now that we have no concept or idea how to value. Gilead and its compadres, Celgene (CELG), Biogen-Idec (BIIB) and Regeneron (REGN) are real companies. But now they are being regarded as Intel, Cisco and Microsoft of 2000. I think that's ridiculous as they, particularly Celgene, simply aren't all that expensive in the out years. No matter for now, the market has spoken.

But if you think, as I do, when these stocks get to below a market multiple on 2016 numbers they will stabilize,, amazingly, because the earnings estimates are moving up fast and the stock prices are going down just as fast, you might get there sooner than you think.

So, how about the rest of the market? Why have so many stocks actually acted quite well during this period, allowing the S&P to stay at or near its highs despite the now well-detailed selling?

First, unlike 2000, as I have demonstrated, these stocks do NOT dominate the S&P. So the analogy is a glib and false one, not supported by the facts.

Second, we are at the beginning of an economic expansion, not a contraction, so earnings and, more importantly, sales, are actually going higher. Why is that not obvious? 

There are several reasons.

Exhibit A: China

We have become accustomed to expecting that any economic revival has to have China as the locomotive. But if you read Caterpillar's (CAT) excellent quarterly conference call, you will discover that the baton has been passed back to the United States. That's because of a resurgence in non-residential construction. as well as domestic oil and gas. Nobody I know saw that coming.

Exhibit B: The Weather

There is no doubt after reading through at least 100 conference calls that the weather did play havoc with many companies. Not all of them, or even some that used the weather as an alibi for poor performance, but it had a distinctly negative impact. One look at the progression of so many quarters, from the autos to the restaurants to the airlines, tells you that things got better and better and you can tell from the glimpses given of April that things have really turned around.

Exhibit C: Europe

While it is off a low base, Europe's beginning to give the U.S.-based companies that do business there a huge boost. So many companies, as diverse as Starbucks to PPG (PPG) to Honeywell (HON) have noticed the improvement and I think it will just get stronger and stronger. It can't offset China, but Europe's a huge market and the sales increases from there are palpable.

Exhibit D: U.S. Treasuries

So many people take their cue from the action in Treasuries that they are simply baffled by what's going on. Those in particular who are ideological think that we are in the midst of still one more downturn and the Fed's monetary policies simply aren't working. This is foolishness. There is a developing high-quality bond shortage that's giving our Treasuries a huge boost. Plus, the action in Ukraine has created a spate of buyers that we didn't count on. That's how come the Fed's taper can occur and rates don't go up. I think the Fed could sell a trillion dollars of its bond holdings and they would be lapped up by those holding Italian, Spanish and Portuguese bonds that don't pay all that more interest. The comparisons are absurd. If anything our rates need to go down lower.

And that's why the utility and the consumer packaged goods stocks are going up right now. The CPG companies do NOT have good earnings for the most part. But as we know from Coca-Cola, McDonald's and Procter & Gamble, it just doesn't matter. The yield's terrific. These stocks are also benefitting from the fleeing of the money from the Amazon-Facebook nexus. The latter was only going higher because of circular reasoning, meaning it was rallying because it was rallying and attracted money from non-growth buyers trying to beat their benchmarks, a la the Red Hots of 2000.

The same thing happened then. It is happening now. That money finds a home in the rest of the S&P and it is doing it now.

Finally, there are the classic growth stocks. They are a battleground, too. What do we do with Disney (DIS) or Starbucks? What do we think about Nike and Under Armour (UA) and Google?

I think this one's not as hard as you think. If the companies report good numbers and good gross margins and are not spending like mad, they go higher. But if they are spending like mad and they don't beat top, beat bottom and beat expectations, well, guess what, they get beaten right around the head.

So, with that, you now know what I am thinking about this moment. It can't be put in 140 words. It can't even be put in a bunch of TV shows.

But you have it now. Consider it your blueprint for the moment, until prices and times change. They always do.

But the patterns stay very much the same.

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