We forgot about takeovers. We forgot about what they can mean to stocks and how desperate some companies are to grow.
And that defines what's going on today.
First, we all know that stocks have come up a lot from the February lows. But it hasn't been all stocks. In fact, it's been a select group of stocks that managed to claw their way back into our hearts, mainly service companies, international businesses, the consumer products corporations and those in resource, mining and minerals.
That said, though, a ton of stocks have been left behind, particularly health care stocks that have been in the doldrums because of politics -- they are easy whipping boys -- and disappointing earnings.
Then all of a sudden someone comes out and says he wants to do deals, and that he might have as many as 10 targets, and one or two will be bought in the next quarter or two, and we are off to the races with animal spirits that jar us into remembering that it isn't just portfolio managers and individuals and index funds that buy stocks -- other companies do, too.
Not only that, but it really helps when the person comes on television and says he is going to do it.
That's right, I am talking about Brent Saunders, the chief executive officer of Allergan (AGN), the once-acquisitive, gone-quiet drug company, who came on CNBC and said now that his deal's off with Pfizer (PFE), he's ready to do some buying.
What will he buy?
Whatever can give Allergan growth.
And with those words, we get a burst of buying in a gigantic portion of the market that's been both moribund and cheap -- pharma and biopharma -- and it lights up the joint. You augment that with oil gone crazy to the upside, the obsession with oil going higher being fundamental to the bulls in this stock market, and it's like a different world out there.
You see, for years we had a couple of companies in the health care space that would be kicking the tires everywhere they could be kicked, namely Actavis, which is now Allergan, and Valeant (VRX). Both companies, because of their foreign domiciles, could buy pretty much any American drug company and make it accretive to earnings.
These two became the colossuses that stalked the Earth and you either got bought by them our you bought someone else to grow.
Then out of nowhere, we got a perfect conflagration that brought the entire edifice down. First, Allergan got a $160 billion bid from Pfizer, effectively taking the biggest, most aggressive buyer out there, Allergan itself, while sating the growth-hungry Pfizer. Then Valeant effectively blew up, a combination of arrogance, greed and politics, namely a presidential year where it managed, incredibly, to supplant the banks as Public Enemy No. 1. You layer on all sorts of questionable, eyebrow-raising practices of ever-higher drug prices and weird methods of distribution that generate steroidal growth, and the next thing you know you have a stock that goes from $266 to $26 pretty much overnight, a currency that went from everyone wanting to no one wanting and a business model that seemed broken.
Suddenly, along comes a newly aggressive Treasury Department, sensing that these drug company inversions where companies move overseas to get lower taxes have to be stopped by someone, even as it had abdicated that role for years, and it kills the Pfizer-Allergan deal.
I said last night that these new regulations, which were a nonchalant way of moving the goalposts right when Allergan and Pfizer were on the field to nail the uprights, should have just been called the "kill the Pfizer-Allergan" rule. Why not? I figured no one else was doing what the Treasury Department stopped, so why bother to call it anything else?
Looks like I was dead wrong. Beginning today, it's the "Jack Lew Drug Bull Market" rule because he freed both Pfizer, which needs to buy someone really badly, and Allergan, which shouts out "Let the speculating begin," to start a while new round of M&A.
I have been saying that without takeovers this group is dead dead dead. In fact, without takeovers it's been a free-fire zone of shorting. Last night when we had a positive technical outlook about this biotech group, I thought, what the heck? This time the Fibonacci Queen Carolyn Boroden's out of her mind. Nope, she said this group's ready to rumble. What a call. I think neither she nor Jack "Drug Bull Market" Lew knew, though, how great a run we could have.
What's roaring? How about all the biotechs that she mentioned. Regeneron (REGN), aided by its new atopic dermatitis drug, is flying because Sanofi (SNY) owns more than 20% of it. Maybe Sanofi pulls the trigger on the rest. Biogen (BIIB) and Celgene (CELG) are zooming, two potential buyout candidates for Pfizer or Allergan. Even Gilead's (GILD) ramping, and why not? So many drug companies have had collapsing stocks that have made them too cheap for anyone to ignore. She's four for four. And because of that, the whole biotech index -- these are big ETF names -- gets taken up, igniting the scoreboard. (Allergan and Biogen are part of TheStreet's Action Alerts PLUS portfolio.)
None of this would be possible if Valeant were getting killed again today. That stock's been a one-man bear market, casting a pall over the entire group because of the political and regulatory opprobrium and scrutiny it has brought to the group. Brent Saunders in our interview took off the table the idea of buying Valeant even down here, but he didn't dismiss the idea of buying one of its divisions, the one he ran, Bausch & Lomb. That plus a buck-up conference call by Valeant cheerleader-in-chief Bill Ackman, the hedge fund manager with a gigantic stake in the company, shackled the bear with some rah-rah worthy more of Villanova than of Valeant.
As I said earlier, though, drugs alone can't make it. You need oil, which had been in free fall since ticking above $40, to turn around. How do you turn around oil? Simple: You have some nameless oil minister from some big Middle Eastern oil producer say, look out, price discipline's going to come out of the April 17 oil producers meeting, a confab that's beginning to take on mythically positive proportions. Worked before; worked again.
Oh, and let's throw in some irony. The Justice Department's decision to file suit to block the Baker Hughes (BHI)-Halliburton (HAL) tie-up released those two dead weights and had their stocks climb on the prospects that they can start acquiring down-and-outers in their segments and start growing again. Eureka, the Justice Department's giving almost as much new life to the oil service stocks as Treasury did to the drug stocks. Who ever said this Obama administration's bad for stocks!
Now, I can hear the naysayers chattering. It's all about speculation, Cramer. Froth. You are condoning froth, you snake oil salesperson. No, I am simply observing two beaten-down groups come to life because the feds have put a spur under them as surely as if they were matadors waving red flags and snorting tormented bulls.
I don't want to be too premature about a froth judgment either as these two groups are hardly surfing the new-high list like the packaged goods and international industrial stocks. They have been bottom-feeders for ages.
So go sneer at what's working. Call into question this phase of the rally. Try to bring it down with some mouthing about downgrades or Fed minutes or whatever. I say the bulls owe a note of thanks to Treasury and Justice for getting the animal spirits going and following the lead of Fed chief Janet Yellen in trying to create wealth for all stockholding citizens of these here United States.