The Bizzaro Market's Pretty Stupid

 | May 21, 2014 | 3:16 PM EDT
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Can the market be this stupid? Can the direction really be set by a couple of ticks on bonds, a fabulous report from Tiffany's (TIF) and some decent news from Target (TGT)?


And, with the help of some frustrated short sellers who are now getting bullish, that's precisely what's happening. Yeah, the people who freaked you out yesterday with chatter about an imminent 20% decline and a recession to boot seem to be silenced for the moment. Don't worry, they will be back again tomorrow, I am sure.

First, let's face it. We are in a particularly moronic phase of equities right now. I say that because interest rates went higher throughout the day and that was one of the chief propellants for the increase in stock prices. Just to let you in on how stupid that is, if I told you that higher mortgage rates were better for the consumer, would you believe me? Of course not. Would you believe me if I said that higher taxes improved your personal economic standing and make you want to spend more? Are you kidding me? Yet that's how wrong the stock market is right now because higher rates hurt business activity and higher rates function as a tax on businesses and consumers alike. Bulls should favor more economic activity and more purchasing power, not less, so anything that sends rates up should send stocks down.

But the collective instincts of the stock market can be very wrong and this market is as dumb as gypsum board, no offense to USG (USG).

Remember, the flavor de jour of this market is that we are headed into a recession, so anything that shows rates going higher discredits that thesis. That's how we can rally on higher rates. But think about this. We have almost no data whatsoever that show us we are going into a recession. We don't even have data showing we are going into a slowdown.

Nor should we even trust the actual rate of interest as a barometer of anything anymore. Our interest rates have been going down largely because there's a shortage of U.S. bonds. Too many buyers, buyers who will accept a lower rate of interest for safety's sake vs. the really awful bonds of other countries that are way overvalued. The polemicists, the ideologists are always blaming the Fed or Obama for policies that impact rates. I am not an ideologue or a polemicist. The government's just not spending much and when you don't spend much you don't borrow much and when you don't borrow much you don't have to pay high interest rates and your credit gets better, so you are magnet for money worldwide.

Now, one day we will be through with this ridiculous nonsense and we will be thankful that interest rates are going down. I am taking my cue here from the acknowledged expert in housing, Home Depot CEO Frank Blake, who expressed surprise that interest and mortgage rates went up at all last summer and pretty much said it was wrong that they did. His conference call, always filled with wisdom, made me feel that housing, which got crushed when rates went up dramatically last year, could come back now that rates are coming down. Blake does not live in the Bizarro D.C. Comics world of the stock market. He doesn't like 'em ugly.  He knows that lower rates means more homes being built and more mortgages taken out, so when the stock market comes to its senses we are going to see housing return as a positive force in the economy.

Now, remember, somehow we got put on recession watch yesterday. The stock market isn't stupid enough to think that a recession is good, so stocks got sold down on that bogus prediction. I have been saying that each day the market looks at the data presented and makes a decision about whether the economy is slowing or speeding up. Yesterday, we heard negatives from Staples (SPLS), Dick's Sporting Goods (DKS), TJX (TJX) and Urban Outfitters (URBN). Those four drummed out the good news from Home Depot that May is coming on strong. Today, we heard from sworn Home Depot opponent Lowe's (LOW), as well as Target and Tiffany.

Lowe's said May is much better because of the good weather. Target said things haven't collapsed as much as you might have thought. And Tiffany said that people are spending like crazy, even if the people are just rich people.

So, we are three for three and now the perception is that things are good again, so rates go down and the stock market rallies. Every day we come in here and forget about yesterday. Every day is a standing start and today was a day when it's hard to believe a recession is on the horizon because of Lowe's, Target and Tiffany. Again, trust me, the stock market can be that dopey.

Oh, and let's not forget that a second thesis is developing right now that it isn't the consumer who is weak, it's the bricks-and-mortar stores that haven't figured out the Web yet that are weak. Yesterday's chief ne'er-do-wells, Staples and Dick's, compete directly with Amazon (AMZN). Lots of people today seemed to understand that people would rather shop for office supplies and sporting goods on Amazon and the stuff that Dick's has doubled down on, hunting and golf, just aren't what the consumer wants.

In other words, we took our cue from the wrong companies. Today's a new day. Who knows what tomorrow will bring? I sure hope we don't take our cue from Sears (SHLD) when it reports. If we do then the recession camp will be in ascendance again.

One thing is for certain. Regardless of whether you think we are going into a recession or not, this market only has eyes for companies with real earnings per share, buybacks and dividend increases. It abhors companies that emphasize any other measure, such as sales, or orders, or cash flow or surveys and accolades. We knows that because last night (CRM) reported one of its best quarters ever and it got hammered anyway. Why? Is it because doesn't know what it is doing when it highlights that it is hiring more people and issuing more shares? Is it because has scorn for the market?

Not at all.

Like many of the high-growth companies, is trying to win as many customers as possible to its platform and to do so it has to have the best software, the best engineers and the best salespeople, something that costs money. If were to please Wall Street and fire a bunch of people, buy back stock and issue a dividend it would be eviscerated by its competitors SAP (SAP) and Oracle (ORCL), instead of doing the eviscerating. That's just a fact of life. Right now the stock market doesn't care about all of the big wins and the good publicity or the fast-growing sales. That's not fashionable right now and remember, not only is Wall Street mercurial and arbitrary about the relationship between interest rates and stocks, it is downright capricious and frivolous about whether it likes companies that have fast-growing sales but little or no earnings.

Right now might as well be wearing bell bottoms and 100% polyester shirts with pocket protectors and a Madras suit coat from K-mart. But the industrials? They are wearing 160-thread-count Brioni suits, with Zegna shirts, Ferragamo ties and Bruno Magli shoes. Or let's get all SAT-like. is to Goldfinger as Honeywell (HON) is to Bond.

The market just can't sustain both earnings stories and sales stories and the latter are being left out of the arc.

Yep, yesterday we were going into a recession courtesy of Dick's Sporting Goods and Staples. Today we are booming and wearing Tiffany jewelry and piling up robin's-egg-blue colored boxes. In either scenario, we just don't like stocks valued on sales, not earnings. The market's amnesia won't last. But right now, if rates go higher because we are off recession watch, the growling bears will turn into teddies trampled by marauding bulls armed with Tiffany baubles hanging from their necks. 

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