So what does a rational market look like? It's a market that reacts positively, not negatively, to good news. One that tempers the negative when the negative should be tempered.
What do I mean? How about some concrete examples.
First, it has been my contention that what's freaking people out and making them panic out of all stocks is not the downward direction of oil but the velocity of the move. I think oil can go lower because there's too much of it being produced on any given day versus what can be consumed in a day. But even when oil just pauses in the decline, buyers come off the sidelines and buy the stocks of companies that benefit from lower energy costs: consumer packaged goods, retailers and restaurants. (Check out yesterday's two-parter about retailers and restaurants for the best names.)
Remember that oil had been kept up not by demand but by a cartel. When a cartel is busted up, that's good for all users and terrible for the cartel. Think of it like this: Let's say that all of the phone companies got into a room and decided to fix price as part of a cartel. Is that a good thing for the 317 million Americans who use phones, or a bad thing? Just consider the oil market as a rigged market that's no longer being rigged. If your phone bill went up huge, it would be fabulous for AT&T (T), Verizon (VZ), T-Mobile (TMUS) and Sprint (S) and all of the tens of billions of dollars they spend in capital equipment, as well as all those who work for the companies. But if you bust the cartel, your phone bills go down as these four compete against each other, even as their stocks get hammered and their capital expenditures are lower. To read the moronic commentary about oil going down being bad for the market is to believe the cartel that conspired to keep oil up was a good thing! Would it be good if the phone companies conspired to get your bill to go higher? Would that be something we would think was terrific?
Today's a day where we celebrated the destruction of the cartel that kept oil higher even as all other commodities have been hammered. It's like the scales periodically fall from our eyes and we recognize that cartels are evil and that our government typically tries to stop them, not encourage them. In other words, the market is acting rationally.
Somehow we have come to pigeonhole those who benefit from lower fuel costs to the consumer level. Today we recognized that many companies have to buy all sorts of plastic and packaging and others have to spend fortunes on glassine bags inside cereal boxes, which cost far more than the grain itself. So does the box for that matter. Or how about stuff in your kitchen and bathroom? You think that shampoo is made of sweet smelling natural fruits and grains? You believe in the tooth fairy then. You think diapers are cotton and paper? Then I can sell you the Brooklyn Bridge, even with the construction. You think that a no-deposit no-return bottle of soda or anything else is made up of biodegradable materials that dissolve into the earth? These are all just gigantic gobs of fossil fuels in many different forms, surfactants, all of those polys and ethyls that are made into different plastics and liquids that are the essence of these products.
Those companies, which often have good dividends, are flying. Again, it's rational.
How about on an individual-sector basis? Do you think that J.C. Penney (JCP), which reported terrific numbers last night, would have those terrific numbers if the cartel were still conspiring to take such a big chunk of your disposable income? How about some perspective here? I heard a lot of handwringing about the 756 people who help make tubing for oil and gas that were laid off at US Steel (X). Every job lost is bad. But there are 116,000 people who work at J.C. Penney. Not that long ago we thought J.C. Penney might go under, taking those jobs with it. But the cartel got smashed and these people keep their jobs. It's rational that J.C. Penney rallies and that all of the other retailers do, too, because it isn't like Penney suddenly took huge share from everyone. It's the additional $1,000 for each of the 117 million households in this country. One hundred and seventeen million households versus a small cartel? Go with the households.
It's also rational that some private equity company could take advantage of the oil-related decline of retailers and snare one at a cheap price. Private equity guys aren't idiots. They know that lower gasoline prices are good, not bad, for brick-and-mortar retailers and their customers. No wonder someone rumored Dick's Sporting Goods (DKS) up 10% on the possibility of a private equity bid, even as insiders are dumping the stock like crazy. It makes sense that it is undervalued, as it has been going down, not up, even though customers are feeling richer for spending less at the pump.
Or how about the monster homebuilder rally, with companies like Toll Bros. (TOL), Lennar (LEN) and DR Horton (DHI) up 3%, 5% and 6%? Some of that is increased builder confidence. But mortgage rates are down huge. And there were rumors of a possible cut in Federal Housing Authority fees, which would be huge for the first-time homebuyer; hence, the companies that manufacture less expensive homes, like Lennar and Horton, are moving up the most. The strong dollar has brought buyers into our bond markets from weaker currency countries during this period, which has allowed mortgages to go to ultra-low levels. Because of fears of what a decline in oil really means, we haven't even thought about what lower interest rates mean for homebuyers. Today we have. That's rational.
You buy a home, you furnish and improve a home. You go to Home Depot (HD) or Lowe's (LOW) and buy washers and dryers, paint and tools. So Whirlpool (WHR), Sherwin-Williams (SHW), Masco (MAS) and Stanley Black & Decker (SWK) go higher. That's Rational.
How about individual stocks? Keurig Green Mountain (GMCR)? It has a new cold drink machine. Coca-Cola (KO) has a stake in the company and I think that it will ultimately be bought by Coca-Cola, but the stock's roaring because Dr. Pepper (DPS) also endorsed the contraption. Suddenly it's got legs, so the stock goes higher. Believe me, if oil were plummeting today, the stock would be lower! That's nutty; this is rational.
Earlier this week General Motors (GM) reported a huge increase in sales for December in Europe, China and most importantly the U.S. It's selling a ton of big-ticket Yukons because the oil cartel has been smashed. Yet its stock has been hammered. We accepted that nonsense as rational because, well, everyone else was selling. But it was irrational for heaven's sake. And you know I never have trouble calling a market stupid.
I don't know about you, but there is something joyous about rationality. It's a reminder that you want to buy the stocks of companies that are beneficiaries of big macro trends, not sell them. It is a reminder that the stock market isn't inherently moronic, even as it can be as dumb as a bag of hammers on any given day (no offense to Stanley Works).
And most important, it is a reminder that you can make money by buying the thoughtless panic of others. Remember, panic is not a strategy, but buying from the panickers is one of the greatest most lucrative strategies known to man.
