Lookin' California, Feelin' Minnesota

 | May 18, 2017 | 3:40 PM EDT
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Things are not always as they seem. In this top-down ETF-driven stock market, it is possible to forget that individual stocks are based on equity ownership in an individual company. Put together, those form the market, but on their own, they can be experiencing massive fundamental differences.

When stocks are jumping, there is a complacency that sets in that can be very expensive. We learned that in 2008 and in 2000. There are two truisms in life: stocks eventually correct and most rock stars die young. We learned that market lesson yesterday with the "Trump Dump," and unfortunately the other one was confirmed this morning with the tragic news that former Soundgarden/Audioslave frontman Chris Cornell had passed away at the age of 52.

Cornell's lyric from "Outshined:" "I'm lookin' California/I'm feelin' Minnesota"-- has been pumping through my head all day.

No couplet better describes the current stock market situation in my opinion. Seeing the S&P 500 and Nasdaq within a few ticks of their all-time highs has many market participants "Lookin' California." When all one has to do to make money is average up on Amazon (AMZN) and Apple (AAPL) all day, it is pretty easy to work on one's tan.

But maybe it took more drama from our 45th president, whose tan looks more mango than Malibu, to remind the market that there are parts of the economy that are, indeed "Feelin' Minnesota."

Many household-name retailers are struggling, and that hurts the mall REITs (and, presumably, the mall rats). The prevalence of empty storefronts makes it seem that our country is mired in a recession, not in the eighth year of an expansion. Retail companies that know how to operate can still produce solid economic returns -- as shown in the past week by earnings reports from Home Depot (HD) and Walmart (WMT) -- but those are a chosen few in a challenged industry.

Autos, lest one forget, are also a retail industry. The lack of U.S. vehicle sales growth in 2017 has put the OEM stocks on ice. I followed auto stocks on the sell-side for 11 years under a buy/sell/hold construct, but I used the term "depressing" when asked for a one-word rating on Ford (F) stock this week. I will not go on another anti-auto stock rant, but that's another segment of the economy that has stalled, albeit at or near record levels of unit volume.

Energy provided about a third of the S&P 500's earnings growth in the first quarter, but the lagging performance of energy stocks shows that commodity prices are still at low levels versus expectations. Also, the current level of oil and natural gas prices is below the level required to produce adequate economic returns in many U.S. basins, the Oil Sands and most offshore locations.

I'm more bullish on oil than I've been in quite some time (and I still like natural gas,) but, darn it, we're still trading at below $50/barrel on WTI. The V-shaped recovery is nowhere to be found, and so many smaller exploration & production companies are having to fight for capital.

So, just in the time it has taken me to write this column, he Dow Jones Industrial Average has risen 100 points. I guess the Trump Dump is over and it's back to La-La Land. Really? The "next Watergate" affected the market for all of one day?

If you are committing new capital to top-down, broad-market ETFs and mutual funds now, you are buying a market that believes everything is Lookin' California. This is against the backdrop of an economy that grew at a robust 0.7% in the first quarter, according to the Bureau of Labor Statistics, which is more like Feelin' Minnesota.

My suggestion: Look for deep value opportunities in the Minnesota sectors and spare yourself the short, sharp shocks in overpriced mega-caps that can come from the market's realization that not all is California.

I'm attending an investment conference today with many such deep-value names, and I'll have details on the individual stocks next time.

Apple is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPL? Learn more now.

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