I know it sounds strange but the stock market's having a real hard time evaluating anything, anything at all, and putting a dollar amount on it. Every day this plays out and it drives me crazy.
For example this morning our market opens down badly because Japan and Europe are down.
Not in the least. These markers are dominated by the automakers. Last night President Trump announced that he's studying throwing a tariff on the automotive imports from Japan and Europe, perhaps as high as 25%. That's terrible for their automakers, and given that the automakers' market capitalizations are so huge, it's a pretty painful issue.
But is it painful for us? It is true that it could be inflationary for us. However, how is it possible that we can open down almost as much as these other markets when it's a zero sum situation, their automakers lose and ours win?
So what happens? Buyers come in and snap up stocks that are marked down incorrectly by what I call the copycat traders, who are almost as bad as the pajama traders who trade overnight. You don't sell our market because their markets are selling off. You sell our market because something bad occurred here and that wasn't the case.
But no sooner do we get a rally then we learn that President Trump is cancelling the summit with North Korea to solve our intractable problems with each other. Trump believes that all previous interactions in the last 25 years amounted to nothing because the United States fed North Korea with the hopes of them disarming in return. Trump's approach is to say that not only will he not let our nation be blackmailed by North Korea but that he's ready for war if they want it.
No matter, the market can't handle that kind of input. Again, the collective zeitgeist is to sell everything because of some sort of existential concern that we are going to be blown up by the North Koreans.
So the Dow gets crushed and we drop 200 points.
Then the sellers come to their senses, perhaps recognizing that unlike Billy in The Predator "We're not all gonna die." So those who believe that we are not going to be obliterated by North Korean nuclear warheads take advantage of the break and swoop down and buy things.
How does it play out in real stocks and not just in S&P traders?
Okay, the other day we had Micron's (MU) CEO Sanjay Mehrotra on and he told one of the best stories I have heard in ages. He plans to buy back 15% of the company because he is convinced that Micron's stock is incredibly undervalued. It's pretty easy to understand given that the stock sells at a little more than five times earnings. It's a buy, buy, buy and ever since it announced this buyback earlier in the week after preannouncing sharply higher than expected numbers, the stock has never looked back.
Once again, the stock started going up from the get-go, then got hit on the auto tariff worries, then rallied and then got murdered by the existential Korean peninsula breakdown and then, well, and then, it just plain takes off and never looks back.
It's valued correctly and then valued incorrectly, then valued correctly and then valued incorrectly, and then valued correctly all within the span of about 120 minutes.
You can't make this stuff up. The only thing that makes sense about it is that there's an emotional component to trading that simply doesn't allow people to think straight. Even up here Micron's stock remains a buy.
We see this stuff play out in different ways on different says and it always astounds me. Last Thursday night Nordstrom (JWN) reported and it wasn't such a hot number and I expected the stock to be down given that it had been trading at $51, slightly above its price of late, as investors thought there might be an upside surprise.
I read the release, listened to the conference call and figured it could be down three and then rally to being down one and a half.
Instead it promptly falls to $45. Forty-five! As if the company's stock would never come back. Great balance sheet, historically good merchants, and that's what happens? At that price the brothers Nordstrom can steal the stock at $40 which is what they wanted to not that long ago before a special committee said it wouldn't be fair.
It was nuts, just nuts made worse by the fact that when you get a dramatic decline in a stock it almost always closes at the absolute low because brokers work large institutional orders and try to get a good average price for their sellers, one that is better than the closing price. The best way to do that is to work the order all day and then sell the last part down hard so the stock closes at its low, which is therefore automatically better than what the customer got on the blended sell order. Brilliant isn't it?
Now the stock is up four from then. It just fell incorrectly. I think it will end up making it all back.
What a colossal opportunity for those who think rationally.
The same thing happened with Kohl's (KSS) earlier this week. The retailer's stock was hanging around slightly above the $64 level where it is currently trading and it reported what looked to be a dramatic upside surprise, one so huge that it sent the stock to $69. But then, on the conference call, the company stripped out a one- time pop to its same store sales because of a friends and family sale. So if you backed out that special item, the company reported actual same store sales were at the low end of expectations. So then the stock drops 8 to $60. Yep, eight points.
Now it is right back to where it was before what was basically a non-event. The emotions ruled and the stock was sold way too low, and, yes, once again, closed at the low of the session on the day of the blow up because of the way brokers work these big orders to get an average price better than the close.
Now I want to distinguish these emotional mis-valuations from the ones that always get talked about. All day I heard that the stock of Netflix (NFLX) is now bigger than the stock of Walt Disney (DIS) , $153 billion versus $151 billion. To me this comparison is as fatuous as one drawn by a reporter who, famously, asked Babe Ruth how it is possible that he made $80,000 a year when President Herbert Hoover was paid just $75,000. His response: "What's Hoover got to do with it. Besides I had a better year than he did."
Both of these thoughts are true. What does Netflix really have to do with Disney? Sure, ostensibly they are entertainment companies. But that's not how Wall Street looks at it. Disney, indeed, is an entertainment company, meaning it's a strong company with good brands that needs more growth because of a slowdown at one of its divisions and is trying to buy that growth by buying Fox (FOXA) .
Netflix, on the other hand, is a one of the highest growth companies in the world that happens to be in entertainment. But its category is rapid growth - something wholly different from a movie company - and it is one of those companies like Amazon (AMZN) that can only be valued as a hyper growth company. If the growth runs out or slows down, believe me that valuation will be crushed. The only issue is the opposite is occurring. It's expanding ever faster into all new markets. It deserves to have a bigger market capitalization.
I say don't be so quick to question a longer term upward stock trajectory when management's great, the management of FAANG for example. It just might be right. But this short term stuff?
It's so wrong so often that it's a wonder we even bother to pay attention to it other than to point out instant anomalies that, hopefully, you can jump on.