I want to be as negative as everyone else. I really do. I try. I understand, for example, that the International Monetary Fund is growing very nervous about worldwide growth and cut its outlook severely today. I get that Alcoa (AA) last night kicked off earnings season with disappointing numbers. I totally get the endless downgrades, good and bad, in all sorts of sectors. But the darned problem is the stocks themselves. They refuse to stay down.
Yesterday, I talked about the nascent leadership that's taking hold in all sorts of areas, from tech to industrials and from homes to consumer packaged goods. I said that they will soon be followed by others as the list broadens, not contracts.
I didn't count on it happening today.
But that's exactly what occurs when the commodity complex goes higher, led by oil, which is breaking above $40 in anticipation of a meeting this weekend that could spell the end of the downward spiral in the group -- something that could lift all boats, even if it seems counterintuitive that it does so.
As consumers, we tend to think that what matters to us and therefore to the market is lower gasoline costs. We are a service economy, and that means spending on fuel. And if there is enough spare change left, then individuals might do more shopping and small businesses might be energized to expand.
It turns out, though, that a combination of autos that use fewer gallons of gasoline, a lack of a long-term belief that oil will stay down, and an almost-universal increase in health care premiums for those to whom the spare change would matter most have conspired to render the upside meaningless.
In fact, the weakest stocks in this market have been the retailers, who were supposed to benefit the most, and the airlines, which have simply fallen apart here, even as I think they are too cheap to ignore.
But the consequences of a precipitant fall in oil like the one we have had are there for all to see: broken loans that will hurt bank earnings, companies gone bust, giant declines in capital equipment needed to drill and move oil and gas around, and weakness in whole countries, such as Canada, Mexico, Brazil and Nigeria.
Worse, much of investing now is done by machines set by investors to profit off of known patterns. And when machines see weakness in commodities, they sell all stocks related to the production of commodities and buy all stocks that take advantage of that weakness, and they do the opposite when they see strength.
So when oil goes up, a whole host of companies go up with it. We see stocks as diverse as Caterpillar (CAT), Honeywell (HON), Cummins (CMI) and Boeing (BA) go higher when oil goes up because there is an expectation that world growth must be better or oil couldn't go higher. The linkage is glaring and there for all to see.
When I see a stock, say, such as United Technologies (UTX), which thrives on a stronger economy, now go up to where Honeywell was willing to buy it on a takeover basis not that long ago, I am blown away. Yet that's just what has happened, and it has happened because the machines are programmed to buy stocks of companies that are going to have rising earnings when commodities are in higher demand.
Now, take it a step further. Every commodity rally in the last few years has boiled down to a belief that the Far East must be doing better. Given that there has been very little drop-off in the actual production of oil, the only way people believe it could advance is if actual demand is picking up.
Now, you know I have become more positive on China ever since the stock market started rallying off its lows and the data coming out of the country have stopped disappointing and the Baltic Freight index, a measure of commerce chiefly related to China's importing of commodities, doubled. I believe that oil use is indeed up in China, and that has been an important part of the advance.
Now, this weekend there's a meeting among many major oil producers, including members of OPEC -- most importantly, Saudi Arabia -- and the non-OPEC Russia. We first heard talk of this meeting back in February when oil was at $26. Oil has since run $16 in pretty much of a straight line, and while that move can be somewhat undone by a disappointing conference, the fact is that demand has improved enough and supply from this country is now dropping fast enough that I don't expect oil to crash back to the twenties.
Because of this run, this market has taken a liking to the oil stocks themselves, especially to those that have raised or secured capital to live to play another day. So many of the most worrisome situations, ones that could really reverberate through the financial system, are, one by one, being taken care of.
Today is Chesapeake Energy's (CHK) turn. This bedraggled oil and gas company is about as strapped as it can get and still be solvent. In return for pledging pretty much every asset, though, it got a new $4 billion lending agreement. Chesapeake lives to play another day.
It's not alone. Marathon Oil (MRO), Devon Energy (DVN), Newfield Exploration (NFX), Hess (HES) and many other smaller companies have all raised enough cash to insure they can get through this tough period provided, 1.) it doesn't last too long, and 2.) oil gets to $50. Of course, not all oil companies will make it. But if big disasters can be ruled out, that's good news for the entire system.
How good is this? Consider the curious case of Freeport-McMoRan (FCX), the debt-ridden oil, gas, copper and gold concern. When commodities were falling apart, FCX looked like it was doomed. Now that they are flying, this stock is proving to be the one to own. Technically, according to Bruce Kamich, a technician I adore at Realmoney.com, this stock may have one of the best charts in the book.
That's right. We are going from bankruptcy fears and hideous loans to loan forgiveness and potential prosperity in just two months' time. We may not have gained that much from a consumer with more change in her pockets, but a market loves a back-from-the-dead story because it brings back not just the company's stock in question, but the banks that lent the money.
Remember, though, the theory that it's the stocks that make me less gloomy than the average bear I see out there. At the same time that the commodities market has found a floor, the influential IMF says that things are getting weaker around the world and economic growth is going to be less, maybe far less than expected.
If you believe what the IMF says, you want to own all of those consumer products stories I have been extolling, everything from Johnson & Johnson (JNJ) and Kellogg (K) to Estee Lauder (EL) and Procter & Gamble (PG).
We are in a best-of-both-worlds situation with the industrials and the oils and the soft goods stocks all going up at once.
That's what makes me so nervous about being too negative even as the first company out of the earnings chute made me feel downbeat about the world. How do these worlds collide?
Perhaps the most negative aspect of the whole Alcoa litany last night came from trucks. You need a lot of aluminum to make trucks, and truck numbers were way down. But the stock of Cummins, the largest truck engine maker, is soaring. How to reconcile? Simple: If things are indeed getting better in the world for commodities, whatever numbers we now see soon will be in the rearview mirror and better times await.
So, stay negative. Regale yourself in the world of a Juniper Network (JNPR) shortfall based on weak telco orders. Treat your gloom to a downgrade of Starbucks (SBUX), which is part of the Action Alerts PLUS portfolio, because the stock's gone up too far too fast. Indulge in the conviction buy-to-hold of L Brands (LB), the chain that owns Bath & Body Works as well as Victoria's Secret.
I am stuck with the fact that more stocks seem to want to go higher than lower, and I have to deal with the reality that as horrendous as things are, these darned stocks and their buyers just refuse to play ball with the pessimists. Or maybe, just maybe, it's not the end of the world as we know it, and stocks want to rally instead of collapse because the Chicken Littles out there just don't have the firepower or the selling power to take down the stocks that are supposed to go down when things are as miserable as they seem.