Molehills, All of Them

 | Jul 16, 2013 | 7:58 AM EDT  | Comments
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Maybe we just fret too much. Think of what's happened just in the last two months. We fretted about a dramatic increase in interest rates. What happened? We got one -- a huge percentage gain. What does the market do? How about, the S&P 500 has its longest winning streak in nine years? How about, the Nasdaq 100 goes up for 14 straight days, its best streak since 1990. We were supposed to be frightened out of our shorts with a run to 2.7% to the 10-year U.S. Treasury, up 100 basis points in a straight line.

As bonds overshot their mark -- meaning that there was no real economic reason for rates to move up that dramatically -- and then came in, it became a buying opportunity. That's right. Something this negative, this horrible and this competitive with stocks became an honest-to-goodness buying opportunity. It had to have been the bears' worst nightmare. This was an event that was startling, profound and obviously negative for stocks -- and it turned out to have been a terrific chance to get in and catch the next leg of this one-sided bull fight.

Or how about gasoline? The average price at the pump is flirting with $4 per gallon. This has to have an impact, right? It's a tax -- a direct tax that takes disposable income and flushes it down the toilet of Exxon Mobil (XOM). How in heck can that not hurt?

So we do we do? Why not short all of retail? Why not short Six Flags (SIX) and Cedar Fair (FUN) and Disney (DIS), the latter especially since Lone Ranger was such a bomb? OK, so you made a couple of bucks, but it wasn't really worth the risk in retrospect. Yet I am sure more people are now trying it again, betting that the stocks don't reflect the higher prices of gasoline that they might be paying this weekend.

Of course, cars use less gasoline than they used to -- but, more important, nobody has belly-ached about the impact of higher gasoline, other than Darden (DRI), which is the parent of the Red Lobster and Olive Garden restaurant chains. Without the grousing, you can't get the big down days you thought you should have.

Or how about the banks? We were supposed to be taking profits hand over fist in that group. I know it. My Action Alerts PLUS charitable trust has a huge position in Wells Fargo (WFC), and boy were we ever tempted to sell it when not one but two analysts downgraded the darned thing right before the quarter.

It turned out they were wrong. The quarter had upside in pretty much every metric it was supposed to have been showing downside, from net interest margin to expenses -- both of which had been going the wrong way. Even as the company admitted that higher rates could impact mortgages, a huge part of its business, the market lapped it up anyway. A good short was spoiled.

Or how about all of the fretting over the personal-computer-parts stocks? All I heard was that the disk-drive stocks were the most vulnerable stocks in the universe, and that the very smart short sellers were all over them. These stocks only seemed cheap, according to short gospel, because the earnings are about to drop off a cliff.

Well, on Monday Seagate (STX) and Western Digital (WDC) hit 52-week highs. That's not supposed to happen. They were supposed to be well off their highs, and while they could go down when they report, they turned out to be horrendous shorts.

You want some serious fret gone spoiled? Remember the Egyptian riots? They were supposed to have a tremendously negative impact on the market. Instead a much more market-friendly regime came in and Egypt has calmed down considerably. How about the protests in Brazil? You know what they did? They marked the bottom in the Brazilian stocks, which seems to have continued rising since then.

Or how about three months ago, when Starbucks (SBUX) and 3M (MMM) announced their earnings? I remember it well, because I was at Villanova University when they reported. 3M cut guidance pretty severely, and the stock dropped a quick 5 points, from $108 to $103. What was that? Why, it was a buying opportunity. After this, the stock proceeded rallied, astonishingly, 10 points. That's a buying opportunity.

I still can't figure out what people initially didn't like about Starbucks, but I remember thinking that my charitable trust was getting a chance to buy this stock below $60 -- down a couple of bucks -- on a quarter that, to me, seemed just fine. Well, it was better than fine. Starbucks put out terrific numbers from China and the U.S. and the stock never looked back, embarking on a 10-point rally in pretty much a straight line. Now, that's what I call a buying opportunity.

Perhaps the best trade of all came from the highest-growth stocks when the interest-rate rally occurred. Those are the ones that you are never supposed to buy in an era when rates are skyrocketing -- and, after that move, I don't know how you can say they weren't doing just that.

You are supposed to go after the most highly valued stocks, since the rate rise signals inflation and a concomitant erosion of what you will pay for future earnings.

Yet how did the highest-growth stocks in the biotech world do? Celgene (CELG) and Gilead (GILD) have been downright unstoppable, taking out their old highs. Look, I get that when it comes to Celgene, as the company had just announced that it might soon be able to reapply for a favorable-use rule in Europe for its bedrock drug Revlimid. But Gilead? Nothing happened at all, and it's been the strongest one in the pack. Makes me want to go buy Regeneron (REGN) and Biogen (BIIB).

But you know which two have really taken off? How about the two stocks that are regarded as the most expensive large-cap stocks in the universe? I'm talking about Amazon (AMZN) and Netflix (NFLX). When I was at my old hedge fund, I used to go after those kinds of stocks when I started, betting that the multiple would shrink so fast off the higher rates that I could coin money. But once rates would stabilize, you'd be history -- and the shorts who did these trades this time are, indeed, history.

Not everything has bounced back. The stocks most definitely in the path of the interest-rate hurricane, the housing stocks, can't get any traction. Nevertheless, they were priced expensively going into the storm, and they have to give back some of their gains, because we know that higher rates do cool housing.

Plus, I think a big percentage of homes is owned by hedge and private-equity funds. I am still shaking from the postponing of the Colony American Homes deal. This is a company that spent $1 billion to buy homes in order to play the housing revival, and that deal was supposed to be the exit strategy for this colossal housing bet. It was to be part of a $2 billion investment that Colony Capital has raised to buy rental homes. Private equity has purchased an estimated $10 billion in rental homes, and the hoped-for idea was bundling these homes into securities such as Colony American Homes -- which could then go public and convert to real estate investment trust status.

What happens if those homes flood the market? What happens if the 4.4% mortgage does crimp the homebuilder sales? It makes sense that those went down.

But the rest of the market? Other than a smattering of stocks, like Blackberry (BRBY) and United Parcel Service (UPS), there's just been no follow-through on the downside. They've all been just one big buying opportunity. Now, before you say, "Wait a second, you don't know yet," I can easily say, "and you can sell everything you bought, and lock in those profits." That's the truth, and those delicious gains can't be taken away if you do so.

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