What happens when you crush the animal spirits of business at the same time that the Fed decides it is going to tighten regardless of how weak the economy might be?
What happens if there's no momentum to the domestic economy but the Fed is so happy that things aren't falling apart that it won't get off its two-hike agenda?
I will tell you what happens. What you are getting on your screen today.
Of course, it all starts with the commodities. The commodity markets are weak again. Across the board. We have copper teetering. We have aluminum headed down. Iron seems to have peaked. The Chinese aren't buying.
And, of course, oil is simply crashing.
You know what that means. It means you are going to get a switch, a rotation into stocks that people had abandoned, those stocks of companies that use commodities and benefit from the decline.
And that's augmented by takeover talk that needs to be explained because it is so convoluted it's hard to fathom.
Let's start with oil.
We've been negative on oil since $53, saying everyone was in the crude pool. We had speculators at levels of involvement that were about as high as we have seen in ages.
But we had no concomitant demand.
We had real producers of oil who are exploring at levels that exceed their cash flow actually priming the pump with futures selling. That's right, they were selling futures on oil to raise cash to continue to pump supply.
Remember, unlike just about every other business, there are no marketing people at oil companies. There aren't people who say, "Whoa, we have to stop pumping right now, we can't exceed our cash flow." Instead, we have oil companies that just can't help themselves and keep drilling like mad. That doesn't mean they will pump it all. In fact, I have been saying that at $45, you will see a decline in the amount of oil pumped, but you will not see a decline in the number of rigs being deployed.
So what happens?
Of course, all the oil stocks get hammered again and they are going after even the biggest ones like Chevron (CVX) , which reported a fine quarter, and Pioneer (PXD) , which I thought issued some pretty good figures last night.
Remember, though, these are just all part of gigantic ETFs, so it doesn't matter. Instantly, any company that needs worldwide growth is quickly matched up with the price of crude and just unravels, even if it just reported that things are exceptional. Companies like Caterpillar (CAT) and Cummins (CMI) , which literally just told you things are great.
More important, though, the flow comes right back to the companies that frankly haven't shown really good growth. It goes back to the drug and food stocks, because oil's signaling recession if the Fed tightens.
Of course, there's collateral action everywhere. Rates are going up because they march to the tune of the Fed, which told you the economy is going to reaccelerate. So you have this bizarre confluence where the bank stocks are actually going higher. If it weren't for the Fed, I think rates would be going lower, taking the bank stocks with them. Not happening that way.
So what do we make of this rotation?
First, it's got some numbers behind it. It always does. This morning Zoetis (ZTS) , the very predictable livestock health and companion animal health company, puts up its usual incredible numbers and it soars. Why not? We know all about the humanization of pets. We also know about the selfie generation's desire to look great courtesy of Facebook (FB) and Snap (SNAP) . Now the former is doing what it has done the last two times, selling off after a remarkable quarter for a large company with 50% growth on its core ad business. Remember, you have to let it come down as insiders can now bail, and they do so pretty routinely. Snap? I remain convinced this quarter will be a good one but I was and am pricey. It's making this move without me.
Then we have stocks like Colgate (CL) and General Mills (GIS) rolling up because last night Kraft Heinz (KHC) reported such a bad number that we know they have to be on the prowl. On the call last night, Kraft Heinz was asked whether any company would really sell to them considering their slash-and-burn m.o. Given that Warren Buffett is invested in the company and he doesn't favor hostile takeovers, who knows? The question had resonance. After all, when the company went after Unilever (UL) , not only did Paul Polman, the excellent CEO of Unilever, object, so did Buffett because he hates the hostility.
Nevertheless, General Mills flew perhaps because people feel it has a new CEO who might want to sell -- no logic there, but we also saw Colgate fly. I think the latter makes a ton of sense and it would be my odds-on favorite. You think there's a recession coming and you want a stock that can be taken over? Colgate's a natural.
Clorox (CLX) and PepsiCo (PEP) , the two companies in the packaged-goods industry that put up the best numbers, get to run. But so do Kellogg (K) and Campbell's (CPB) because those are perennial takeouts and I thought Kellogg's quarter wasn't as bad as it used to be. Damning with faint praise. (Facebook and PepsiCo are part of TheStreet's Action Alerts PLUS portfolio.)
Finally, we have an extraordinary move in Anheuser Busch (BUD) as it showed some very big numbers, especially for Stella and Corona -- an instant read-through for Constellation Brands (STZ) , by the way, because it has the American rights to Corona. Procter & Gamble (PG) , which didn't have a good quarter, has found its footing. I think it may be one of the more undervalued in the group because you are buying it roughly at the same prices as Trian Group, the engaged investor company run by Nelson Peltz, which has a big position and I think can shake things up.
If you are thinking like me, it just seems all pat and predictable. Until you remember that tomorrow's the Labor Department's non-farm payroll number, and because of the heavy layoffs in retail there are big bets being placed on these deflationary trades that might be done even without oil's decline.
The obvious trade -- the one the algorithms just get programmed to do until oil goes back up, which I think is a distinct possibility now that it has hit my downside target -- just gets triggered and you can't untrigger a machine any more than you can teach a dog a new trick.
So let it play out. Buy some oils, small, because they are overdone. Don't bet on a takeover. But wait until we see tomorrow's number. It's going to wipe today's slate clean and give you a new one to draw on.