This Market Should Be Flunked

 | Jul 14, 2014 | 1:48 PM EDT  | Comments
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If this market were in grade school, where it truly deserves to be, its report card would be a horror show. You'd see D's in arithmetic and current events. You'd see E's in science and reading comprehension and see F's in everything attitudinal, from attention paid to helpfulness.

Now, in some cases, the pupils who are getting these subpar grades toil in the overpaid vineyards of the brokerage houses that play such key roles in recommending stocks. In other cases, it's the fearful sellers who sell all at once. And then there are the reluctant buyers, who only want to come in when the smoke clears.

Let me give you some examples of the kind of second-rate work that's become routine.

I want to start with Boeing (BA) because the attention deficit disorder here is so great that pharmacology's badly needed to restore student attention.

For weeks now, as Boeing has slid into the abyss of being the worst stock in the Dow of late, I have urged you to buy it ahead of the huge Farnborough Air Show. I reiterated this judgment four times in the last 10 shows and repeatedly in Real Money.

I told people to stop selling it and to start buying it because at the airshow CEO Jim McNerney, one of my Bankable 21 executives, would put to rest all of the nagging worries that have driven the stock down to $126 from $138.

First, I said he will correct the impression left by many analysts that the huge aerospace move is now over, revealing that he's got a lot more orders than he can handle. Second, I said that the fuel differential of the new planes is so great that a new upgrade cycle is upon us because of the rise in the price of jet fuel. Third, I said that you need not fret the defense business decline because it is in the stock. Finally, I told people that despite the endless drumbeat that the Republicans would kill the Ex-Im bank, the entity that offers cheap financing (allowing Boeing to compete head to head against the heavily-subsidized Airbus), the company's confident that the EX-IM charter, threatened by the defeat of Eric Cantor, the second highest ranking member of the GOP and a huge supporter of the bank, will be renewed.

My support of Boeing fell on deaf ears day after day until the end, when I said that I didn't even care anymore. Go sell it, if you wished. It's up to you.

So what happens this morning? CEO Jim McNerney comes on television and says that the airplane cycle, far from being nearly over, is flourishing and will continue to flourish because of the tremendous gains in light-weighting that saves fuel costs, the largest variable for all airlines' profits. The payback is almost immediate, he says. The book to bill for orders is running ahead of last year's and he expects it only to get better, a sure sign that the cycle has more to last. The defense business? He saw it coming and scaled the business back. But the new tanker re-fueler program will provide decades of earnings, plus there are some organic growth contracts that aren't in the numbers. The Ex-Im Bank? McNerney's confident that it will be re-upped because it is way too important to American businesses and jobs. The biggest problem facing Boeing? Demand and how to meet it.

So what does the stock do? It immediately gains back what it lost and then some. The market's getting an F on this one.

How about URS (URS), the big engineering and construction company that got a huge takeover bid from AECOM (ACM) this weekend. I wanted to see how much overlap there is from the federal business of each company. Instead, what did I find? How about research that said URS was overvalued and should be sold because no one would ever bid for the company. Wall Street wanted this stock sold after a smart activist took a position and pushed for a sale. How stupid is that?

How valuable was URS? The best way to judge? The amazing leap in acquirer AECOM, which has rallied almost 10%.

How about a not-very-gentlemanly E for unhelpful? 

The how about Citigroup (C)? Just when no one cares any more about a bank, just when we had pretty much decided that the stock's the least likely to succeed, it reports a very strong quarter, solves its entire Justice Department problem for a decent price and has its biggest black hole, Citi Holdings, the cordoned-off cats and dogs loan collection that was a constant bleed, turn into a profit center.

It's the exact opposite of Wells Fargo (WFC), a stock that's a victim not of bad earnings -- I love them -- but high expectations. The love for Wells Fargo is only rivaled by the hate for Citigroup.

How about this market's incredible lack of memory. Do you realize that last week we saw Facebook (FB) collapse under a huge wave of selling? When it was going on we heard everything from a decline in user engagement to a potential shortfall in the upcoming earnings. I decried the decline as just the handiwork of one or two sellers who were banging it down in a thin market. A week later the stock's up $5 from the low. The reason? More buyers than sellers because the only research was simply a reiteration of a strong recommendation. Where were these buyers last week? No doubt just plain fearful.

You want to see some really bad arithmetic? How about the value subtraction we got out of Barclays today in its upgrade to Buy from Hold of Apple (AAPL) on the disarray at Samsung and a potential upside surprise. It's got Apple moving to the mid-90s today, up a buck and a half.  But should it? What if I told you that the same analyst downgraded the stock back in February at $75.88? What school gives a kid a gold star of an upgrade without taking into account the downgrade at a much lower level?

Not that long ago, this market couldn't give away Gilead (GILD), the biotech with the revolutionary Hepatitis C cure. We heard that every major pharma company was working on a rival product and the insurance companies weren't going to pay for the company's drug's giant price tag. The stock was pounded down to $65 as the company was perceived to be finished. Now it's at $89. You know why? Because it is making so much money -- as the insurers pay the company's freight -- that it is now able to buy another company or many companies to diversify away from the Hep C pill.

How about Whiting Pete (WLL) buying Kodiak Oil & Gas (KOG) this morning. KOG was supposed to be overvalued because of the incessant takeover talk. But today Whiting issues a huge number of shares to buy Kodiak, making it the biggest producer in the Bakken and Whiting jumps five points! Whiting! So much for Kodiak being overvalued.    

Finally, there's the action in Alcoa (AA). At the bottom last year at this time, Wall Street almost uniformly hated this stock, holding CEO Klaus Kleinfeld in contempt for his failure to create value. Now, 100% later Alcoa's the most-loved mineral and mining stock out there. Analysts love Klaus's approach to closing expensive plants. The critics who wanted the company to split up now like the integrated aluminum upstream finished product downstream. The same dolt at the helm is now regarded as a visionary, except a gigantic move's already been made. I say bulls should hope that the company files a gigantic equity offering to help pay for a brilliant aerospace acquisition, in order to get a lower price to purchase the stock.

These are all examples of how poorly the market's doing its job of valuing stocks. Unfortunately for most, the mistaken valuations are all case by case and you might not be able to benefit as much if you just own an index fund. Fortunately, there are so many deals and mis-valuations out there that you benefit almost daily from the slothfulness, indolence and outright idiocy that the market seems to show every day at the opening school bell.

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