Don't Try to Buck These Trends

 | Jun 03, 2014 | 3:42 PM EDT
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When you get a powerful trend, you don't avoid it, you embrace it. When you get a negative trend, you don't question it, you avoid it.

Those two tenets are defining the day today, and they are reminders that you have to heed the market unless you are willing to take a beating, a needless beating that I think you can sidestep if you just listen to the footsteps of the thundering herd.

What are today's footsteps? First, we need to respect that once again our domestic oil and gas stocks just won't quit. Many of you seem to want to know when I will stop my obsession with these stocks. The answer is, perhaps when they stop making you money?

What's going on to move them yet again? First, we are getting new data from the Permian Basin, where Pioneer Natural Resources (PXD) and EOG (EOG) have huge holdings, that once again there is a guiding up of the amount of recoverable oil, and a new pipeline is coming to relieve the glut in that gigantic field, the one that Pioneer said is the second biggest in the world. Now we are hearing that Devon Energy (DVN), which has a huge position in the Permian as well as in several other plays including the Barnett and the Mississippian, is considerably behind the group and is about to play catch-up. Wells Fargo raised its price target on Devon today from a range of $70 to  $75 to a range of $85 to $90, on the revaluation of its holdings.

Now it is finally feels like it is dawning on people what I have been writing here for months and months, that coal is officially dead in this country. The EPA was lenient in allowing governors to determine how they were going to reduce reliance on coal over time. But one thing is certain, if you are a utility, you cannot afford to build a coal plant ever again in this country, as you will force the governors into closing other plants. Given that we are also de-commissioning nuclear plants, and given that the permitting and cost of those are now beyond the reach of all utilities, that means it's game, set match for natural gas. The particular natural gas that is needed to supplant the big coal plants is located smack in the middle of the Appalachians. Whoever had spare natural gas is going to have clients galore, and that is why even a speculative company like Magnum Hunter (MHR) makes so much sense.

Also, you may not have noticed, but the offshore oil drillers, which are considered to be the pariahs of the group because drilling rates have been going down, seem to have caught a bid. I think that's because the longer oil stays above $100, the more likely that the big national oil companies have to step up drilling, and that means Brazil and Mexico, which need all the rigs they can get once they start going after the deep oil.

The second positive trend? Now that interest rates seem to have troughed and turned up, I think because the overwhelming weight of the evidence shows that the recession crowd was just plain wrong, we are seeing some outperformance in one of the worst groups imaginable, the banks. Today, the Financial Times reported that Goldman Sachs might be expanding its wealth management and commercial banking business. I have long held that Goldman has never been beholden for long to one losing division. Goldman has relied too heavily on fixed-income trading for profits. It is time to start firing there and start hiring and buying in wealth management. That means growth is coming.

I like the way the regional banks in strong areas of the country are starting to rock here. I am talking about banks such as KeyCorp (KEY) in the heart of the Utica shale or SunTrust (STI) in the now-rebounding South. Wells Fargo (WFC) has been terrific, but have you noticed that JPMorgan (JPM) has been creeping up? Remember that JPMorgan already preannounced terrible trading revenue. I don't think it will preannounce again.

Finally, I like the way the airlines keep blowing through key levels and don't quit. I think that's because there is less and less competition, and the rates are staying strong, and judging from what Boeing (BA) has been saying of late, good luck getting a new plane anytime soon, and since oil is so high, you can't do much with used and older models. American Airlines (AAL) and Delta Air Lines (DAL) remain my favorites.

The need to merge or wither in the food aisles continues. Pilgrim's Pride (PPC) raised its bid for Hillshire Brands (HSH) last night, topping that of Tyson Foods (TSN), a sure sign that you can pay pretty much anything for heft to deal with Wal-Mart (WMT) -- huge client -- and Kroger (KR). At what point does the loser just say that it will go buy Bob Evans Farms (BOBE), with its terrific sausage brand, and just sell off the restaurants? And how much is Oscar Mayer worth to one of these two companies? Whatever it is, it's more than what is buried in Kraft (KRFT).

And how about those negative trends? The companies that are hiring, not firing, the companies that are issuing shares, not retiring shares, the companies that would never think of paying dividends because they are too busy paying for growth at any price, keep getting hammered. Today a critical piece in The New York Times questions whether's (CRM) whole model of hiring the best people is in jeopardy, because its stock price no longer wants to go higher. The article questions whether there's a there there when it comes to ever making profits.

Meanwhile, The Wall Street Journal is finally reporting what I've been writing and talking about endlessly, that the secondary offerings from software and big data companies have destroyed the golden goose and there's just way too much stock sloshing around. It's just so hard to get your footing when you don't know if you are going to be hit by a piano of insider selling the moment you stumble outside the fallout shelter and into the stock shopping street. The red ink in these stocks is so painful that you fear even contemplating a Splunk (SPLK) or a FireEye (FEYE) after such a downturn, Momentum remains a dirty word.

The only solution for these stocks? There must be consolidation. There has to be a reason to believe that major companies are going to use the weakness in the best and most proprietary of these software stocks to nail down the verticals, so to speak, to acquire their way into the enterprise via companies such as Concur Technologies (CNQR), which owned the travel and leisure space, or Yelp (YELP), which dominates in the cyber yellow pages. Of course, these companies have to be willing to sell themselves, so it is going to take two to tango, and I don't know if we have any Arthur Murray dance classes going on in the software-as-a-service or e-commerce sectors yet.

And it's not clear how much people are really taking seriously the Apple (AAPL), Facebook (FB) and Google (GOOGL) food fight. Apple's Tim Cook made some jokes at Google's expense yesterday. But the jokes, coupled with reports that Facebook is going to go after some of Google's direct advertising business, are putting the same amount of pressure on those two as was on Apple yesterday. Competition is a wonderful thing, unless you own stocks of companies in competitive situations.

We have trends that work, and those that don't are in play at this very moment. Oil and gas, the banks the airlines and the foods are all roaring. Momentum tech remains in the tank. This is one of those moments where it pays to be a follower, not a hero. And there are no medals for trying.



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