The 'Not Sustainable' Claptrap

 | Jun 02, 2014 | 7:25 AM EDT
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"That's not sustainable." Those are the four words that have keep many an investor from making the right decision about a stock. That's right: "That's not sustainable" is the bane of the bull and the honey for the bear. While this idea hasn't worked since the bottom of the Great Recessions, it still reigns supreme among the cynics that rule the media and predominate in hedge funds that can profit from shorting stocks.

What does it mean when someone says, "It isn't sustainable"? Let's talk about the life cycle of news events. It all starts with a good number. Let's take, for instance, a strong reading in the Chicago purchasing managers index -- like the 65.5 number we got on Friday, up from 63 in April.

Now, that's a strong number, and a sign of some robust behavior in the industrial sector. But the "not-sustainable" crowd was immediately interpreting it negatively. "The weather got better," was the first alleged chink in the armor. Then it was, "There had to be some one-time only business included in that number." That's a frequent criticism, just like when you get a strong durable-goods number and we hear that it's all about aircraft deliveries -- as if, somehow, aircraft deliveries are one-time only when in reality they are the U.S.'s biggest consistent export.

Then we get the usual from the polemicists. It'll be something like, "If this is all this economy can deliver with the Fed still buying bonds like mad despite the tapering, then who knows how poorly it will perform when the buying stops? Maybe it will never be able to stop given how weak it is." How long have we had to live with that claptrap, ever since the data has been captured by the agenda-ists and ideologists who politicize everything and are about polemics not facts? They are more responsible for keeping you out of stocks than any other force I have seen, including a not-that-pro-business White House.

Of course, the Federal Reserve now has little to do with all of this, as interest rates on U.S. Treasuries now have a mind of their own, and have nothing to do with the Fed. In fact, the Fed should be selling bonds in order to meet the demand and close out its bond-buying program, while also generating some more profits for banks. In this way, banks might want to lend more instead of hoarding capital in order to meet the next lawsuit.

Believe me, this "That's not sustainable" faux-analytics happens at every level in the discourse, which is why it is all so insidious. Let's do a line-by-line textual analysis.

Last week on Mad Money, I spoke with Jack Koraleski -- the CEO of Union Pacific (UNP), which is arguably the most important transport company in the U.S. He described business as "good" -- which, when I mentioned this to many market followers, was greeted with a riposte that Jack wears rose-colored glasses. No matter that, last year, Koraleski took the extraordinary position that he had to issue a pre-earnings warning because he was worried about volumes at Union Pacific, and they did decline ever so slightly from earlier predictions. He's so money-good on this prediction issue, but nobody bothers to remember that or even care.

How did he arrive at his judgment that things are good? First he stressed agricultural numbers, which were up 14% year to date. Of course, anything ag is regarded as unsustainable, even though I thought that was an amazing number, given the horrendous weather conditions we've had. Second was the industrial business. Much of this is related to what goes into housing, which can't be shipped well by truck, including lumber and glass. Well, given how mortgage rates have fallen and how housing starts are down, you know that's a declining business that's not sustainable. Coal has increased 7%. The not-sustainable crowd says you can kiss that number goodbye because of the rule-making by the Environmental Protection Agency, even as utilities have decades to put that through.

How about autos at 4%-plus growth? That's not sustainable if interest rates keep going down, because that means autos must be weakening. Chemicals were flat and oil was down big. Ah hah, finally something that's sustainable. Of course, that's because a great deal of oil was going to where Union Pacific had been shifting it -- so much so that the oil companies had to choose a different rail line in order to ship it to the east.

Every line. Every measure. Except the bad business. That's how I see it played, macro and micro. Doesn't matter that to me that combination of the purchasing managers index and Union Pacific spells out positives. Whatever positives exist are clearly unsustainable. And that's a major reason why, wrongly, so many investors have one foot out the door.



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