Brainwashed! That's how I feel about those who genuinely believe that if interest rates go higher, anybody's interest rates, then you have to sell everything.
That's why I want to spend some time on the notion that good is actually good, that when positive things happen to economies you tend to get markets that go higher, not lower.
At the risk of being like Cramer-fave Reddit and explaining what can drive stocks like we are all five-year-olds, I am going to explain why good, is, well, good!
It all starts at 3:15 a.m. That's what time I got up this morning because I am tracking this German bond market. Right now German bonds are going down in price and up in interest rate and it is causing tremendous tumult worldwide. For a brief moment a month ago, if you bought German 10-year bonds you were making, basically, nothing. If you bought those bonds you were an idiot, or I guess a dumbkopf because you never buy something for 10 years that pays you next to nothing to own it. People who buy those are basically following Sonny Corleone's admonition to his brother Michael, "Did you go to college to get stupid? You are really stupid."
Anyway, now those bonds are plummeting in value and those who bought them are getting annihilated and their fearful reactions and flailing are affecting markets around the world, including ours, something I saw as I sat mesmerized in my jammies watching the S&P futures go down as German bonds rolled over. Now there's a sight!
But you know what? That's just hedge funds making true short-term correlations but bogus longer-term judgments. That's because these funds are making a judgment that as rates go up in Europe they must go up here and that means stocks have to come down.
Now, normally, I would agree that any rate rise is significant and negative. But in this particular case I think that's off base. We are getting a rate rise in Europe because the economy is getting better there and therefore there is more demand for loans, more demand for money. That's actually totally positive. Rates should never have fallen to where they were when the "get stupid" crowd bought them. They shouldn't even be this low. I expect more pain for those who violated Sonny's dictum and I know this is hard to believe but I actually looked like Sonny when I had hair.
Again, though, the reason for the rate rise is because more business is being done. I must emphasize that's good, not bad and that's because there are three different positives that I have to stress.
The first is that many U.S. companies do a ton of business in Europe and it's been killing them that they do. Our technology companies, our industrial companies -- chemicals, papers, aluminum, aerospace, autos, you name it -- have seen horrendous declines in Europe for some time now, causing estimates, and therefore stocks, to come down like clockwork every quarter. That could be ending.
Second is that any country that has a strong economy will have a strong currency, even if the government doesn't want one. Just imagine Europe as one big country with 770 million people. When that country gets stronger, it is a magnet for money and that's what's happening now. The euro is going higher and that's fabulous for our companies that do business there, almost all of which had pretty much given up that the euro would ever go up within the next year or even two. I get that. The European Central Bank was doing its best to make the euro more affordable vs. the dollar so goods priced in euros, like BMWs and Audis sold better than our cars. It was working, still is, but if there's demand for the goods there's demand for the currency. We are used to the management of companies guiding down estimates because of the weak euro.
That could be changing.
The third reason why more business is good: China can be resurrected because a quarter of its exports have traditionally gone to Europe. The continent has been a huge drag on China. I think that's changing and China's fortunes will change with it. Again, keep in mind I am way ahead of others in this belief, but I was way ahead of others on a turn in Europe and I've been right.
Now, it would be one thing if interest rates were so high in these countries that it could hurt business. But they are so low that these interest rate increases are minuscule and actually meaningless for all except the buyers who went to college to get stupid.
Unfortunately these injured bond bozos automatically sell everything around the world, which is why I come back to that weird decline in our S&P 500 futures even as the three-pronged scenario I just traced out is clearly good for U.S. companies.
Which brings me back to the U.S. Once the wave of selling subsided as it did when our interest rates, which had been rising in lockstep with Germany, turned around in late morning, the futures turned positive and stocks rallied.
Again, we could freak out that rates hit six-month highs but I have the benefit of age and I can tell you that rates have plenty of room to rise before this economy gets derailed. Remember, it is the velocity of the move that matters right now not the direction and as long as rates creep up over time rather than jump up at once as they did in the overnight markets, we will be fine.
Now, let's deal with the matter at hand: stocks. If you trade everything in lockstep like a hedge fund and only care about the S&P 500 I can't really help you. That kind of binary up down thinking doesn't interest me. I am interested in the stocks of companies I like at the prices I want to buy them. This whole knee-bone-connected-to-the-leg-bone-German-American-bund conundrum is giving you a chance to buy exactly the kinds of stocks that should be going up, not down.
Take IBM (IBM), which I am talking about tonight. IBM does a huge amount of business in Europe. It could stand to lose contracts to others in Europe, say, SAP (SAP), which is based in Germany. It had dramatic declines in sales and earnings in Europe because of the strong dollar-weak euro combo. It needs more business to get done in order to have more orders. All of that could be happening, yet the futures drove this stock down to $168. I like that price.
Of course there's a whole other group of stocks that do better in this environment, names that get taken over because the fundamentals are improving in Europe. So, take Pall Corp. (PLL), a $12 billion company that sells filtration equipment, about 40% of which goes to Europe. If Europe turns and it is, then this company becomes coveted, which is why it is up 18 as not one, but two companies, Danaher (DHR and Thermo Fisher Scientific (TMO) want to buy it. That, again, is part of the good news is good news equation.
Many companies are, indeed, worth more to others than to themselves, something, again, the futures don't understand. AOL (AOL) gets bought by Verizon (VZ) because it's worth more to Verizon than it is to the market. Rosetta Resources (ROSE) gets bought by Noble Energy (NE) because it is worth more to Noble than to the market.
That's just the way it is.
Now, things can ebb and flow. At any given moment you will see an interruption to the euro's strength, perhaps because of the ridiculous drama in Greece. You might have a dollar surge here because some Fed pop-off says rates need to be higher.
Still, though, I hope my point is clear: more business is positive for stocks not negative and will remain that way until interest rates go so high that it hurts commerce. We are nowhere near that level, which is why you need to take advantage of those people who went to college to get stupid and sell precisely what they should be buying if they only thought of stocks as pieces of companies to own rather than pieces of paper to trade.
