Boy, do I hate talking about bonds. They are so quintessentially boring. They go up pretty much in unison and down in unison and beyond that there's not much to them. When they're sold en masse, interest rates go higher, and when they're bought aggressively in size, rates go lower. But today they are all that matters. That's because these days when rates go higher, it's game on for a host of stocks, particularly the ones that have languished of late, notably the cyclicals, the retailers and, most important, the banks.
For years the driving forces in the bond market, the reasons why rates go higher or lower, had to do with inflation and the Federal Reserve. If bond holders thought more inflation is coming or, perhaps more important, anticipated the Fed talking about higher inflation and the need to tighten rates, then they dumped bonds and rates flew higher. You get great job growth, rates go higher. You get big retail sales, rates go higher.
Concomitantly, if inflation's tame and the Fed isn't anticipating an acceleration of it, then rates go down.
Of course, there are some outliers. In a crisis, when nothing else is trusted, money floods into risk-free assets, and Treasuries are the ultimate risk-free assets because you are getting the full faith and credit of the U.S. government guarantee. Don't be snarky, that's still better than the guarantee of an Apple (AAPL) or a Johnson & Johnson (JNJ) , to name two cash-rich companies that seem pretty darned good.
But these days we have a huge outlier, and the outlier is President Donald Trump. When Trump seems to be in authority, when he is ascendant, when he is addressing business leaders and talking directly about his "phenomenal" tax plan, there is a belief among bond holders that this economy will get hot and that bonds, which had gone up greatly, sending rates lower, should be sold.
When you put the tax plan front and center, it's scary to those who are willing to settle for 2.38%, the current 10-year Treasury yield, because if Trump gets his way, many of the men and women who have been hiding in bonds will start fearing the economy will overheat, driving inflation higher.
It's funny how this stuff works. I don't think Trump has ever strayed from his agenda. But there's plenty of stuff going on in Washington, whether it be the travel ban, or the Cabinet appointments or the Supreme Court picks or Ivanka's brand being ripped out of Nordstrom (JWN) , and it can obscure the prize of lower taxes that can generate more jobs than any tariffs or trade retaliations.
Today, though, in his meeting with airline-related execs, the agenda got put front and center, and when it does, and the action in the bonds ratifies it, then stocks go higher. The bonds call the tune. Not the stocks. When you add the fact that the Senate seems to be turning against the so-called border tax, where importers would get hurt and exporters gain, then you have another reason why rates should go higher and some beaten-down stocks rally.
The border tax is how some of the more hardcore Republicans want to be sure the tax cuts don't balloon the deficit. So if it's not going to happen, then the government's going to have to issue more bonds and borrow more money. A surfeit of bonds leads to higher rates. And the retailers that have been such a horrendous bid can get new life because the border tax is so punitive to them.
And let's throw in one more. We know deregulation is where so much good can happen. We are hearing about how there could be legislation that would scale back bank stress testing. Now let me be clear on this. You don't need that legislation to pass. All you need is for the regulators not to be so darned tough. If they give a pass to the banks, then the banks can pay bigger dividends and buy back more stock than we currently think possible.
Oh, and one more thing, there's no way the Fed will stay on the sidelines if it thinks Trump is going to bust the budget. We could get three or four rate hikes and that would be fantastic for the banks. They've been trading down on the prospects of fewer rate hikes. Now they go up on the prospect of more!
Sometimes the stars really do align because of Trump's potential prowess or the damage he can do to the budget, if you want to be all negative about it.
Today, for example, we saw big moves in the industrials that would so benefit from repatriation, lower corporate tax rates and stronger growth. That's how a Cummins (CMI) , the big engine maker, can rally so hard on what looked to be a so-so quarter. I can't believe that one's at a 52-week high. Watch 3M (MMM) , I think that can break out here. Same with Honeywell (HON) . Jeez, let's go downscale with Cliffs Natural (CLF) , the iron ore company, which reported a good quarter and saw its stock zoom 17% as if it were taken over.
You see bank leader JPMorgan (JPM) , which had been stalled, taking off and running. Remember, we get a bunch of rate hikes and it can make as much as $3 billion more than currently thought.
And how about these retailers and apparel companies on the possibility of the failure of the border tax? What would you say to an all-time high for Cramer fave and Action Alerts PLUS holding Costco (COST) ? Or how about the big gain in Nike (NKE) ? Nike! Even Target's (TGT) stock is higher.
A big rally in retail even takes things up that should be down, none other than Whole Foods (WFM) , which reported a disappointing quarter last night but is starting to get more rational about store openings, meaning it's no longer growing for the sake of growing.
Trump put his muscle behind the airlines, telling them he's not going to let foreign carriers with government backing take it to us. Boom, the group flies. Remember, we like Alaska Air (ALK) , great quarter the other day, and Southwest (LUV) , neither of which needs protection from foreign carriers. But they all move together even as American (AAL) and United Continental (UAL) are the ones that have been most disadvantaged.
And when things go right, they really go right. Today, following on yesterday's turn in oil, we got a second-day rally. Remember, when oil goes down, the U.S. drills less and even shuts wells. And the companies with the lowest-cost oil, like Pioneer (PXD) , soar, tacking on 11 points.
Alas, not everything rallies on a day like today. The stocks that have been climbing, the ones that don't need Trump's might, namely the FANGers, can't get out of their own way. Facebook's (FB) red-hot stock got hit, although some of that might be a spillover from the hideous Twitter (TWTR) quarter, as I wrote earlier. (Apple and Facebook are part of TheStreet's Action Alerts PLUS portfolio.)
But in general, this is a day where the major chord is finance and that's music to the bulls' ears.
So, watch the bonds. They have become a referendum on Trump's plans for lower corporate taxes. When rates go higher, then you get that's instant beam up of the industrials and the banks. The rest, all gravy.
Random musings, club embers: Hope you enjoyed the AAPlus conference call today. Stay tuned for info about a replay if you missed it.