The industrials, those big, fat ugly ducklings that have gone unloved for ages, suddenly are looking mighty good, and while they paused today, it's worth asking if it might be the pause that refreshes.
Let me set the scene. Of late we've had a pretty certain consensus: If oil goes higher, it's a good day for the market; if oil goes lower, it is a bad one.
The urgency of that formula plays out large today because we learned that JPMorgan Chase (JPM), the bank that calls itself a fortress, has $44 billion in oil and gas exposure, kind of making it the Exxon (XON) of banking, with, hopefully, Exxon's discipline. Oddly, given the plummeting price of oil, the bank only has taken $815 million in reserves and just added another $500 million even though $19 billion of its portfolio is loaned to firms with junk bond status and 39% was made to exploration and production companies, the worst of the worst when it comes to who has the dough to pay anybody back.
The bank said the energy company losses could cost it as much as $2.8 billion. But to me, after living through a loan-loss cycle for housing and mortgages and bad trades that amounted to far more than that, I can only say, give me a break, where did you get that number and I am not buying it. Not for one minute. I think they could double that number and I wouldn't but it, either. Sorry.
I didn't like anything about this discussion. JPMorgan reported a little more than a month ago. Why didn't they say something then? It isn't like oil wasn't low in January.
Were they being hopeful? And I am not assuaged that Jamie Dimon just plunked down $26 million to buy 500,000 shares of his company's stock? So what? He's got all kinds of money to call all the bottoms he wants. If oil goes much lower from here, he's got some averaging down to do.
This outsize oil and gas exposure does put a whole new spin on the negatives of lower oil and gas prices, although from public records, JPMorgan has twice the oil and gas business of Bank of America (BAC) and Wells Fargo (WFC), both of which are part of the Action Alerts PLUS portfolio. Before you freak out and say, wow, are they under-reserved, as I did when I read this, remember this is a really big bank and this isn't "The Big Short, Part Two." That said, it was distressing to read and it makes me not want to own the darned thing.
Oh, and let's not minimize this: If oil stays down here, there will be a lot more defaults and a lot of banks taking big losses, not just these three -- although again, to be clear, there are a lot of oil and gas companies that can manage their bills if oil stays above $30. But not above $20, and heaven forbid if it goes down to $10, these banks stocks are going to be the worst places to be after the oil and gas companies themselves, as many if not most of the independents will not make it through $10 oil.
It's not all bad, though. The combination of some colder weather and a stronger consumer -- presumably some of that from the lower oil and gas prices -- let Macy's (M) do a little better than expected. Couldn't have hurt Home Depot (HD), either, which gave you a monster beat and made you feel terrific about all the makers of materials that go into homes. Wal-Mart (WMT) is now back to where it was before that disastrous quarter that, judging from the delayed reaction, clearly wasn't that disastrous at all.
So oil and gas going lower in the real world is a mixed blessing.
And I know that it's a drag that every conversation has to start with oil. But if I didn't, then I simply would not be giving you an accurate depiction of what's really driving this market, particularly now that the financials will always be spoken in the same breath as the oils after JPMorgan gave you its rosy read of a very unrosy situation.
Now let's talk about what is intriguing into this financial- and oil-led selloff: the industrials
Until today, there has been an industrial renaissance going on -- or, to use the parlance of Wall Street, one of those rotations -- where the industrials, after hanging back, are now in the front, spiking the ball down on hapless and sundry other groups in a vicious game of stock market volleyball. Thwak, the steels have rallied. Bonk, the machinery companies have roared. Bamm, the rails have crushed it.
And it all culminated in the story that David Faber broke yesterday about Honeywell's (HON) outreach to United Technologies (UTX) to create a blockbuster aerospace, safety and climate controls company that could dominate not one, but two huge industries: aircraft and heating, ventilating and air conditioning.
Now, we talked today to Greg Hayes, the plain-spoken CEO of United Technologies, who point-blank told us in a variety of ways that the deal wasn't going to happen and he would not have his company succumb to a bid from the now-larger Honeywell for what was rumored to be $108 a share with his stock at $91.
There was an otherworldly quality about Hayes' outright dismissal of the idea based on antitrust -- none other than there were reports that the combination initially was explored by United Technologies, not Honeywell. Hmmm. If United Tech thought that it might be a good idea and didn't seem to be particularly worried about antitrust when it allegedly made an overture to Honeywell, then why scorch-earth-it now, which is what happened on the show this morning for certain, when Honeywell comes back with what seems like a tidy sum?
Who knows what really happened.
But I do know this. The acquisition highlighted something that's been lost entirely in this bifurcated market, where Kimberly-Clark (KMB), Procter & Gamble (PG) and Clorox (CLX) trade at immense levels to their earnings while many of the industrials wallow around in purgatory because of fears over China.
No, I am not a fan of Caterpillar (CAT, because I don't like the earnings prospects, but wait a second. If some company were big enough to take a run at this $38 billion behemoth that sells at almost half what it did not that long ago, doing so with a long view, I can see it.
Eaton (ETN) is coming down now, but it had a spectacular run from $46 to $57 as people figured out that it could be bought given its now bite-size capitalization of $26 billion. Plus, it yields 4%.
Sure, Cummins (CMI) is up from $79 to $97, giving it a $17 billion valuation. But it still has a 4% yield and I think, after the Honeywell-UTX talk, it isn't going back to $79. It makes me want to go pick up the book on Ingersoll-Rand (IR) and make some calls with that industrial company way down on its luck at $53. It was at $70 not that long ago. Could someone take a long view and go for a run at Deere (DE) down 20 bucks from its high to a current $24 billion market cap?
Oh, and if you want a cheap aerospace company, take a look at what will soon be the new Alcoa (AA), which will most likely be a company with a market cap south of $10 billion with almost $6 billion in aerospace revenues. How in the heck does that enterprise stay independent?
I mention all of these possibilities because if you had told me 48 hours ago that any company would take a run at the $75 billion market cap stock that is United Technologies, I would have said, "Dream on." But it happened. And the fact that it happened makes this formerly scorned group something to start scouting as we head down the oil abyss into less-overbought territory.
So, let's face it. This market hates the banks and oils and gases. It's neutral on the pharmas. It's slightly more positive on the consumer spending plays.
But it's got the potential, after the Honeywell-United Tech revelations, to be a boon for the once-shunned but now compelling on-the-way-down industrials that we had left for dead and buried under a Chinese wall just a few weeks ago.