Market Discourages the Best of Us

 | Jul 17, 2014 | 1:10 PM EDT
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Why is this business so hard? I think it's because there are amazing cross currents everywhere that make fundamental security analysis so hard right now.

We all know the obvious one: interest rate distortion. We have to wonder why rates, the principal competition to stock, remain low despite better economic times.

Some of that is, of course, the Federal Reserve, which is bent on having sustainable economic growth that puts a lot of people to work before it raises rates. I know that some very smart people like Stanley Druckenmiller, a very keen observer of rates, said at "Delivering Alpha," considering all of the strong inputs we have, including the recent employment reports and industrial figures, suggest that the Fed is well behind the curve. But there are bond buyers galore today as there are so many other days, so it isn't all on the Fed.

Some of the cross currents have to do with activism. Put simply, the worst stocks have a tendency to become the best when the heat is on them, as we know from Microsoft (MSFT) today, which had underperformed for years and is now a spectacular performer in part because of a boardroom shakeup.

And there's some of the newer, more obvious, cross currents come from the likes of hostile offers (think of Valeant (VRX) for Allergan (AGN) and Fox (FOX) for Time Warner (TWX).

I'm not talk about those seismic events. I am addressing the more difficult anomalies that are peculiar to this market and this economy. Put simply, the patterns that we go by are really messed up.

For example, today we had a housing start number that was incredibly anemic, miserable even. So who gets hurt when we have such weak numbers? Building suppliers. Who are they? I would say the obvious one is paint. Typically I would then bet against the paint makers. Two of them reported today and, while the overall market took a tumble because of Russia-Ukraine tensions, they are among the best performers today. What's going on? Consolidation in the industry? Excellent execution? Maybe both, but the macro to micro pattern sure isn't working.

How about autos? We are getting incredible sales numbers from the automakers. So why not buy the biggest auto sales company out there. Autonation (AN)? How about because the company is investing so much money into the business that it dinged earnings? That's not supposed to happen. But it did.

We have had a remarkable resurgence in the transports, even as oil has climbed relentlessly higher. Again, thrown for a loop.

And today we have oil spiking off of the problems in Russia and which stocks are hit hardest? How about the domestic oils which are the ones that have the most to gain from Russian turmoil.

Finally there's Yum! (YUM). For years this stock has traded on China and how well KFC's doing. I even talk about that in "Get Rich Carefully." But today the stock's been crushed? The reason? How the other two legs of the stool, the normally placid Pizza Hut and Taco Bell. The historical pattern simply didn't hold up this time.

I put all of these together not to say "Don't get involved in the market right here." That's a poor takeaway.

This market's been rewarding, for certain. But as I search for why there is so much antipathy for a rewarding market I come back and say, "Aha, it's because most of what you have learned just isn't making you money" and in the end sometimes that's so discouraging as to amount to disgust, even as we all know that this has been among the most rewarding of markets. 



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