What's with all of this top-calling?
Here we are, back at 18,000 on the Dow, and you have to wonder how we got back to this level. What made us run up to a benchmark most would have thought impossible just three months ago?
The secret? A singularly odd group of stocks that have one thing in common: They are the least-expected winners imaginable.
Let's start off with the biggest gainer -- Caterpillar (CAT), up 16%. CAT reports Friday, and the one thing we do know is that it won't be pretty.
Why do we know that? Because Caterpillar's end markets are in tatters -- oil and gas, earth moving, coal mining, large construction projects, road building. I can't think of a worse group of customers. Plus, Caterpillar has a gigantic business in China, and we all know how weak China is. Latin America is a disaster, quite a change from just a few years ago.
In short, Caterpillar has been a terrible earnings performer, far worse than we would have thought four or five years ago. However, Caterpillar's stock reflected all of these negatives coming into 2016. It was hard to come up with anything in December that made you feel that this stock deserved to go higher.
Worse, one month ago the company appeared to slash first-quarter earnings estimates while keeping its full-year guidance for 2016. Immediately the bears took aim at CAT, saying that this was a disastrous development.
But that was a totally wrong read. Indeed, CAT has never given any first-quarter guidance. The real takeaway was that CAT felt confident in its earlier 2016 guidance. Given that that most people who really follow CAT thought that was an impossibility, this revelation of estimate preservation resonated positively when the smoke cleared. It, plus the retention of CAT's dividend, calmed investors into thinking the worst is over.
Since then, two things have happened. First, the dollar has peaked against many major currencies, including emerging-market currencies. Second, the Baltic Freight Index, which measures the movement of the kind of heavy dry-bulk goods you need a CAT earth mover to get out of the ground, has more than doubled, going all the way up to 659. Now, all of this edifice can come tumbling down when the company reports. For now, though, CAT is the most unlikely hero of 2016, the quintessential representative of the rolling bull market that's taking up the industrials.
Speaking of counterintuitive, the second-best performer is Wal-Mart (WMT), which has advanced 13%. This one is nothing short of incredible.
As was the case with Caterpillar, there hasn't been a good word said about Wal-Mart in more than year. But all I can say is, "So what?" Wal-Mart got oversold when the company lowered the boom last year on its earnings estimates. Since then, it has done nothing whatsoever to beat them.
In fact, I could argue it has gone backwards when it comes to its omnichannel attempts. But the thing is, Wal-Mart, like CAT, perhaps should never have gotten down to $56 last November. It had been going down for months from $90 to $60 when we found out how bad things really were, and all I can say is the stock was way ahead of the news, as is often the case. That's how you get a 13% advance on no new news whatsoever, except that most retailers are doing badly because they focus on apparel, and these guys focus on everything.
3M (MMM) had a major fake-out when it reported last. People had been expecting a disappointing number because the company is levered to worldwide growth, and the growth had been totally disappointing. But Inge Thulin is one of those CEOs who readjusts on the fly and fixed the underperforming dividends while pouring money back to shareholders. In February, he announced a $10 billion buyback and an 8% increase in the dividend and explained how new products would drive the growth that so many thought the company couldn't summon.
In other words, like Caterpillar and Wal-Mart, 3M came into the year with very low expectations and really didn't need to do all that much to dispel the gloom. Candidly, unlike CAT and Wal-Mart, 3M had a step up in earnings that drove this 12% gain. The others just got oversold. But it's truly a powerhouse member of the Dow.
Verizon (VZ) is up 11%, and I think that this is an example of both a better-than-expected quarter as well as a yield that's safe and big. When Janet Yellen scotched the four-rate-hike thesis, this stock became a bond, and its 4% to 5% yield sent it skyrocketing. Does it deserve the increase? Yes, given how hard it is to find steady yield.
IBM (IBM) has been up forever, but can it maintain its 10% gain? That depends what it says after the bell.
Exxon Mobil (XOM) and Chevron (CVX) are both up 9%, and you may think that's odd given that the Doha conference led to no freeze. However, oil in 2016 is all about supply and demand. Supply is dropping here so fast that, when matched with increasing demand, it yields a higher price regardless of the freeze. That's why they have been and can keep climbing.
United Technologies (UTX) has had several high-profile disappointments, but earlier this year Honeywell (HON) made what amounted to a hostile bid for the company. That drove the stock up 10 points, but, amazingly, the stock only has built on that run, tacking on another five points. How is that possible if we have no clue of how its earnings are doing?
I think the run is part and parcel with the industrial bull market we have seen with Caterpillar and 3M. The market collectively has judged that there is too much negativity given the possibility of a return to growth of China, low rates here and the potential for a turn in Europe, all of which could amount to better-than-expected earnings later in the year. With that armory, it makes a degree of sense that UTX is up 9% for the year.
Like all of the big cyclicals, this move is fueled by, well, nothing. We have seen nothing good yet from UTX. It's all on the come, which makes the longs uncomfortable and emboldens the short-sellers. However, the efforts of the latter have been nothing short of disastrous as the market believes it is only a matter of time before things get better in the world.
How many times have people told me to get off the McDonald's (MCD) bandwagon? However, I am convinced that CEO Steve Easterbrook is fundamentally turning this stalled-out, old, tired, once-growth company into the worldwide juggernaut it had been for so long. I am not saying you ain't seen nothing yet given the stock's $30 run under his tenure. But the darned thing was so undermanaged I do not think it is done going up. It should never have been in the low $90s and high $80s to begin with.
Finally, there is UnitedHealth Group (UNH), which has gone up 8%. Like so many of its brethren, people thought that UNH would have a horrible year because it was taking a beating on the health care exchanges that the federal government had created to take care of the uninsured under the Affordable Care Act. What we didn't count on is that UNH would be bold enough to pull out of the exchanges that it was taking a beating in. Just like the other stocks, UNH simply didn't deserve to sell at the same low level if it wasn't going to lose as much money as we thought it would.