We call it "the setup," as in how are stocks set up going into events. Today's all about the setup and I am not as crazy about it as I would like to be. It's a major reason why Dow 20,000 eluded us again and a reason why the averages looked a little peaked throughout the session.
Exhibit A, the banks. Don't roll your eyes, the bank stocks have been the leaders of this rally. Actually, that's a huge understatement; they are almost the be-all and end-all of this rally, led by the stocks of Goldman Sachs (GS) , which is up 46.5% in the last three months, and JPMorgan (JPM) , which has rallied 26%.
They've got a phrase on aircraft carriers when Navy pilots are about to land, they say, "Coming in hot." These two are the essence of coming in hot. Non-Dow stock Bank of America's (BAC) not much different: It's vaulted from $17 to $22 since the election. Only Wells Fargo (WFC) has lagged. Sure, it's jumped 10 bucks from $44 when Donald Trump won the election, but it still isn't back to where it was before the cross-selling scandal. It traded at $58, four points above where it is now, 18 months ago.
The issue with these stocks, so vital to the next leg of the recovery, is that you need interest rates to go higher if they are going to go higher, and interest rates seem to have peaked for the moment. Sure, many Fed governors are talking about the need to raise rates and we know that four rate hikes can produce $3 billion in extra profits for JPMorgan because it can make so much more money off your deposits than it can now.
We also know that deregulation, something that President-elect Trump has talked endlessly about, will truly benefit these stocks. Hate the banks or like them, they haven't been able to lend or use their own capital as aggressively as they would like, and that has hurt earnings. But the more the mainstream media talk about the resistance from the Senate, including Trump's party, the more concern there is that maybe the deregulation portion of the agenda may be hamstrung.
So the stocks are coming in hot, with JPMorgan, Wells Fargo and Bank of America all reporting Friday and Goldman reporting next week, yet the backdrop is less than optimal. I don't like that setup. It would be so much better if the stocks were to sell off ahead of the quarters given the more negative news and interest rate background, but we don't have that.
We discussed this very issue on the Halftime Report with Scott Wapner today and none of us around the table thought it was worth it to sell the banks because we like them longer term. However, without a pullback, these stocks are vulnerable. Maybe that's why a high-profile upgrade of the banks from Hold to Buy over at Wells Fargo today, including making Bank of America a top pick, had no impact. Bank of America actually fell today. Coming in too hot.
Second instance? Health care. We've seen a pronounced bounce in this business ever since the election as the market seems to have put behind it worries that Trump might tweet about price increases for pharmaceuticals. But we've got this JPMorgan health care conference going on, the big one I talked about Friday, and I think the whole affair is more muted because of worries about pricing. Sure, the industry got a boost today from a $5 billion takeover bid of Ariad Pharma (ARIA) by the Japanese drug company Takeda at a 75% premium, something that's very important because Ariad makes orphan drugs for obscure cancers, where prices tend to be very high. But drug earnings are coming up, too, and here my concern is the incredibly strong dollar.
These companies have gigantic exposure overseas currencies, all of which are weaker versus the dollar, and numbers will have to come down across the board based on the stronger greenback. Sure, the president-elect has offered the potential for lower corporate tax rates and a better rate on repatriation of assets. But those now seem more pushed out than they were given the resistance we keep hearing about in Washington to Trump's plans. These stocks are not set up for a Trump tweet and a derailed agenda. I wish they were down more.
Then there are those pesky oils. We saw crude get crushed today, losing two bucks in a heartbeat. These are two hard-fought bucks and with oil at $51, down a quick four bucks, there doesn't seem to be a lot of room for the oil stocks to go higher. If anything, we now have to expect them to move lower, and with Chevron (CVX) and Exxon (XOM) so key to the stock market's rally, how can we count on them to do the heavy lifting that's necessary? If anything, I see them going down, not up.
Finally, there's tech. Out of nowhere we keep seeing gains in some of the old-new favorites like Alphabet (GOOGL) and Facebook (FB) and, most important, Apple (AAPL) , which got a high-profile anointment from Morgan Stanley's Katy Huberty, calling it a top pick because of the coming iPhone 8 as well as the possibility of repatriation relief. Remember, Apple has $40 per share in cash overseas so there's a real reason to stay long this one beyond my endless admonitions to own it, not trade it, something very out of synch with the trade-happy analysts who cover it. (Wells Fargo, Alphabet, Facebook and Apple are part of TheStreet's Action Alerts PLUS portfolio.)
But here again, I gulped when I heard the call. You know today's the 10th anniversary of the iPhone and it's been a huge hit. However, we don't want to get too excited about the iPhone given saturation and a drop-off in sales. We especially don't want to embrace a term Huberty used that always cause me to blanch: a call for an iPhone 8 supercycle. We have learned the hard way that any time there's a call for a supercycle we think about the tops in coal and fracking sand, the last two trends that were cursed with supercycle hoopla.
Ten years in, an iPhone supercycle? It almost feels like jinx but it did cause the stock to break out of its rut and helped drive the Nasdaq higher. Still, I want downbeat talk, not upbeat chatter to keep expectations low, even as when I hear that this phone might have wireless charging, I start regretting that my wife got me the 7 for the holidays.
All is not lost. We got two huge downgrades today from Goldman Sachs, which took both Coca-Cola (KO) and Procter & Gamble (PG) to outright sells. Let me say right up front that if you are an individual investor, you may not want to take action on either of the two Dow Jones names. Goldman's concerned that both stocks are expensive and have earnings risk.
But I think both stocks have things going for them that aren't being considered. Coca-Cola and Procter & Gamble are world-class companies with solid 3%-plus yields that might indeed go down a few percent. But an individual who takes profits in these stocks might not have a chance to get back in them. We can't recommend flipping these stocks. They are too high-quality with fabulous long-term records even as Coca-Cola of late has stumbled and Procter is higher than I would want it to be.
But that said, what I like about this call is that we need more negativity about stocks in general. We need more sells. You can't sustain this move without more negativity building and we can thank Goldman Sachs for giving us just that.
Still, here's the bottom line. We don't want stocks to come in hot to the quarterly earnings period. We want things cool. There's too much heat. We could use some down days ahead of earnings period to give us some room if earnings aren't as perfect as they need to be after this historic run.
