Who is clueless? Is it the buyers or the sellers? Someone is clueless. Someone doesn't know what they are doing.
That's how I think about this market every day. When you see U.S. market futures rising overnight, right into the Spanish bond auction results at 4:30 a.m. EST, and then see those futures taking a huge dive when the auction's awful, with extremely high rates -- much higher than a month ago -- you know the buyers of those futures at 4:29 a.m. were idiots. That was just a terrible trade. The same goes for buying any of the European markets right before the auction results, when those markets were mostly flat. Soon after, they turned down more than 1%, and in some cases more than 1.5%. It was just stupid beyond belief to buy.
But then we get here, and we discover that if we aren't trading the S&P 500 -- if we are looking at individual stocks -- the market is doing just fine. For example, nobody who bought Children's Place (PLCE) last night was stupid. The stock's up $6 from yesterday. If you decided, "to heck with the Spanish auction, because this stock is going to deliver," you are doing terrifically.
If you thought MeadWestvaco (MWV) was undervalued with a juicy yield, you were real smart if you bought the stock, because it is splitting up and bringing out value by selling its office products group. Not that long ago, the company also agreed to purchase Acco Brands (ABD) and an office supply company spun off by Fortune Brands (FBHS). So that's another home run today. But if you were worried about Unicredit, the large Italian bank that so many say is troubled, you missed that gain.
Of course, those who decided they didn't want to be in Angie's List (ANGL) -- an Internet company that gives you reviews of businesses as well as data collection about them -- you missed some real easy points by fretting about French bond yields.
Or, if you were lucky enough to get some of the 8.75 million shares of LinkedIn (LNKD) that were offered at $71 -- deep in the hole from where it was not that long ago when the secondary offering was filed -- you can get a huge gain. However, nothing was coming your way if you decided that the Spanish bond auction was going to frighten you out of circling some of that merchandise.
Of course, you might have bought the major banks because you thought the worst was over after they reacted poorly to something that everyone knew -- a warning from Fitch, the ratings agency, that they could be in trouble because of European ties. Nevertheless, if you bought the regionals, the Huntington (HBAN) and the KeyCorp (KEY) and the First Horizon (FHN), you don't even know anything's wrong.
What's the conclusion? Are people stupid who buy stocks? Don't they know what awaits them? Don't they know there's doom ahead?
The answer, from these examples, is "no." They aren't stupid if they buy the right stocks. The people who trade the futures though at various points are real stupid. They aren't investing. They are gambling -- and the tables and the odd aren't known. They are simply too difficult to fathom, and they are linked, and linked closely. They can get lucky. We see data that is so strong here, like the decent unemployment claims number from this morning, coupled with some better-than-expected Fed reports and pretty good industrial production, and the futures pop from their lows.
But that, again, is not investing. That's just hoping to get lucky.
The moral of this story? The futures buyers are alternatively clueless or smart. Who needs that? They, I think, are per se wrong. The buyers of undervalued companies that are unrelated to Europe are smart if they have done their homework and know that something can be done to bring out value.
It's mighty simple when you use that prism.
Of course, the big bet of the bears is that one day there will be a domino collapse of all the banks and the countries, and when that happens it will be 2008 all over again, and everything will be going down.
To me, though, that could be a one-off event. It'll be a terrible series of days, for certain, but then a bounce-back will follow when people recognize that their companies will come back if they aren't interrelated. "Interrelated" in that instance, however, might very well be a subjective issue, which is a real worry. You might own stocks that are also owned by holders who thought they were so safe because they were margined -- something we find in a lot of the higher multiple stocks -- and they could be crushed.
But they, too, can come back fast.
By the way, the same goes for the higher-yielding stocks. I do not expect Kinder Morgan Energy Partners (KMP) to go down a lot if the European banking apocalypse occurs. However, hedge funds might have borrowed money to magnify the returns that you get for owning these steady-cash-flowing companies that keep raising their dividends, and these funds might have to raise cash and dump even those terrific stocks.
What's the solution? I think you have to do some difference splitting. You can own the unrelated names and the higher yielders, but you also have to have a higher-than-normal cash position. In this way, if the apocalypse occurs -- and it will occur if these countries do nothing and let things take their natural course -- you can buy the stocks that get hit the hardest that have the least to do with Europe.