Don't you feel like you are waiting for an autopsy report to hit your desk to explain what really went on in the market this week?
I mean, was it actually just some bad tech earnings and an employment number that might put March back in play because the Fed only seems to care about employment numbers and no other chaos?
One thing is certain: I have never seen stocks in worse hands in my life. Whether it is hedge funds that are in trouble, or mutual funds getting redemptions, or insiders dumping, or sovereign funds deleveraging, I have rarely seen such unstoppable carnage than what I saw yesterday.
Now, some of that carnage just comes from the new ways of the market. The S&P 500 futures easily overwhelm the common stocks and the exchange-traded funds and the double ETFs and the no-uptick rules are all part of the accelerant. We never fixed any of these things during the great bear market of 2008-2009, and we have been content with the double- and triple-short instruments for ages because we haven't had such concentrated selling pressure in ages.
Plus, no brokerage firm is going to help any client out of a stock anymore. That business is gone. So, you could see sellers just piling in almost with no regard other than to have a better average at the end of the day than the closing price. That's why you can never bottom fish intraday anymore.
But what have we really learned?
My main takeaway is that when we are in these kinds of vicious selloffs you always have to ask what defenses individual stocks have in this environment. We know, for example, that strong earnings are not a defense, or we wouldn't see Facebook (FB) and Alphabet (GOOG, GOOGL) or Starbucks (SBUX) -- all holdings in my Action Alerts PLUS charitable trust portfolio -- break down like this. They are helpless in the onslaught. They are simply being re-rated as if they are mortals. Of course, all stocks are mortal, but not every stock deserves to sell at the same multiple. Days like yesterday say they do.
What can explain this newfound revulsion?
Some of it is that we are in the "fighting the Fed/fighting the tape" era now. Remember, when the Fed starts raising, you hear lots of people tell you not to worry because rates are so low. They are missing the point. The late Marty Zweig, who coined the phrase "Don't fight the Fed" didn't care where the rates were when the Fed started tightening. He correctly was anticipating a tightening cycle, where every new piece of data is interpreted negatively because the Fed has a tightening bias.
When you have a Fed that takes pains to say that it does take into account other data points besides employment, that's the same thing as the Fed saying, "Look, we care primarily about workers' wages going higher and they are, but we might include some other stuff, too."
So, if you rewind the tape, you know that was the setup for certain post-employment reports.
As far as fighting the tape? That's the technicals. If you have not been reading the exclusive chart work of Real Money's Bruce Kamich, you have been on the other side of the trade. The charts, with the exception of the utilities and gold miners, are almost all hideous.
That's deflation and fear speaking, not inflation and super-growth wage inflation yelling, but Fed chief Janet Yellen is only listening to the latter -- as if wages jacked up by minimum wage bidding really matters. The Fed can't control them.
But we need to be much more cognizant about gold. Kamich has been highlighting the charts of some of the absolute worst gold companies, the ones that are the most levered. Of course, he's looking at the charts; I am looking at the balance sheets. When you see the junior golds jumping, though, it is a sight to behold, and ignore them at your own peril.
The move in gold comes from overseas, and it has to do with the terrible action in the European banks and, as my tireless colleague Matt Horween points out, the bank preferreds. Real Money's James Passeri has done a must-read story on some of these banks, and I am told there is more to come. Standard Chartered, Royal Bank of Scotland (RBS), Deutsche Bank (DB) -- they are all scary-looking charts, for sure. We can only presume that these companies have exposure to commodity producers, including oil and gas, that can create some nasty hits. Does capital have to be raised?
We didn't get answers in 2011, and we aren't going to get them now.
But, what, you may ask, has this to do with Salesforce.com (CRM), to use the metaphor for Friday's action? Very little, actually. That's a whole other kettle of fish that has to do with what some think is a real slowdown in Internet/Cloud adoption coming, where there is an actual economic slowdown that is affection hitherto non-affected sectors.
That cuts back to LinkedIn (LNKD). Many people, yours truly included, didn't realize how loved LinkedIn was. I haven't been a fan since a previous blow-up in April 2015, where I never was satisfied what the company said about its earnings miss. I just stopped paying attention to it.
For many, though, including the seven analysts who had loved it, this was a total betrayal, as I am getting the sense that it had been telling people very recently that things are good. That makes people ask, "So what if Salesforce says things are good, LinkedIn says they aren't and they are both Cloud, mobile and social forces?"
I know this is false linkage. You know it, too. The sellers, however, don't think that way and we have to respect their inability to wreck a stock more boldly than the fundamentals ever can. Plus, if we have to use the new metrics of valuation that LinkedIn is giving us on growth stocks, then these all, including Salesforce, have further to fall.
I know some of you are tempted to ask about the long-term view. Of course that makes sense, but remember: a basis is a basis and if you can get a better basis to start, you are more likely to be able to handle the pain if it turns out it's the other way. And we are in pain-tolerance mode -- as in how much pain can we take?
Let me throw in one other point on valuation. I spoke with Mark Fields, CEO of Ford (F), yesterday and actually read him a quote from a piece of research where he chided for being, basically, too optimistic.
His retort was simple. Right now, the numbers look good so he can't say they look bad, and with employment and the price of housing being the two key determinants of his company's fortunes, he can't be downbeat here.
He certainly acknowledged issues in Latin America and he noted that the spike in China sales had a lot to do with Chinese New Year timing. Still, what matters is that this company's stock -- which sells at 5x earnings and yields about 7% if you include the special dividend -- is acting so poorly that you feel like the stock has to know something that Fields doesn't. You can say the same thing about GM's (GM) Mary Barra -- they have the same set of parameters.
All of this leads me to say that the uncertainties of pretty much every asset class except the utilities and gold mean that you have to wait until three technical situations resolve before fundamentals come back into play:
- You need to be oversold. The S&P oscillator I pay for is still heavily overbought.
- You need to see the charts get better. They have been dead right so far, and I can't go against them.
- And you need to see stocks rally midday, which tells you the forced selling and the big "average better than the close" sellers are done.
Until then you will not "safely" be able to make decisions on good stocks of good companies without getting your head cut off from the get-go.