Uncertainty is one heck of a pain, isn't it?
We've got uncertainty in Italy, a country without a government but a real big bond market -- the third largest in the world -- that has gone completely haywire.
We have uncertainty in Spain where the government faces an uncertain future.
Argentina has sky high interest rates. So does Turkey. Brazil has a trucker strike that looks like it can virtually close the country for business.
So the question is simple: how much is our market up on all of this nonsense given that these events are dramatically lowering our interest rates, a huge positive for 90% of our economy?
Nope! We're being crushed by this. Just crushed! And our markets are getting whacked like the world is going to end.
I want to talk about how wrong this all is but before I do so, let's talk about what all of this stands for.
First, the market hates uncertainty. These are all events that inspire uncertainty and you are not going to rally on uncertainty as much as it might made sense to do so.
Second, there are many individuals out there who still think that a crisis "over there," wherever there is will eventually mean a crisis here. Consider the 1994 tequila crisis -- the Mexican peso crash. In retrospect it was nothing more than a small correction to our markets.
We had some doozy crises like the Asian contagion that reached our shores in 1997 and the Russian contagion of 1998. Then there were the various Greek crises, the Cypriot crisis and the Spanish and Italian and Irish crises of various varieties. Each one provoked pure fear in this country as we wondered how our banks would fare and which would go under. Yes, that was the dialogue.
Third, we're up a lot and lots of people are looking for reasons to take some profits. There are few better excuses than an international crisis even as, in the end -- as I show in another piece earlier today -- these are reasons to buy not to sell. It's just that you have to buy different things.
Still, I totally respect the decline and cautioned at the beginning of the day that this selloff could have legs as there are always people who react to fear with fear itself and they will turn sellers tomorrow which might be a better opportunity to buy. Being scared and buying stocks don't go hand in hand.
Now, lets go over why this move, once it settles -- and it will -- is a good reason to buy, not sell.
First, all of this negativity and fear is causing interest rates to go down and go down fast. Last week when I saw that oil could go down hard, I predicted that rates would go to 2.75% on the 10-year -- they're almost there -- and that that would ULTIMATELY be terrific for most of the stock market, emphasis on ultimately.
I also, though, said that, initially, we are going to be in a heads-the-bears-win-tails-the-bulls-lose situation because the whole selloff in bonds and rising interest rates scenario was not the reason the stock market got hit. It was foul trade that made for an uncomfortable situation for the bulls. China's too important for the rate of growth of many companies and the stocks of those companies had to come down. It would not be made up by increases in the stocks of the banks. It wasn't.
But the bears cannot have it both ways. Lower rates can reignite the housing market which had a bad April and a weak May. That's incredibly important because every aisle in Home Depot (HD) was doing bad as well as Home Depot itself. The stock of Toll Brothers (TOL) got hammered ostensibly because of gross margins but really because of higher mortgage rates. They could be done going higher for now. That's terrific as this is a big, visible group that had become mired in a true bear market.
But how about those banks? Aren't they going to be hurt by the fact that the Fed might not have to raise rates as fast as investors want them to? Okay. Nonsense again! The financials need higher rates to boost their earnings if the economy stays strong. However, aggressive rate hikes assure that it won't and banks will miss their numbers. We shouldn't just care about rate hikes. We want measured rate hikes, so we don't have a Fed-induced recession. This hiatus insures that.
How about the issues with the European banks? Don't we have to worry about the Italian banks, or the Germans? Again there is that uncertainty element. But I can assure you that the Italian government in conjunction with the EU central bank will save Unicredit, really the only major European bank. Germany is a total club and the club has too many members to let Deutsche Bank (DB) fail. However, the more likely scenario is that our banks pick up more European business. This is already happening in New York where JPMorgan (JPM) has been a beneficiary of Deutsche Bank's departure from key business lines here. It's all good news. And U.S. companies that may be tempted to issue bonds overseas where the rates are lower, and the issuance has better tax status, will go to U.S. banks to handle the foreign deals. Terrific business.
Now, it gets even better. The truth is that our banks had to recapitalize a long time ago and are flush with capital. No other country insisted on forcing capital raises on their banks, especially Europe. So the only contagion will be European money out of their countries and into our banks.
Then let's go over the oil crash. I know it seems like something that just caused oil to fall 10% has to be good. You can tell that the negativists are framing this as a falloff in demand when it is clearly a boost in supply from Russia and Saudi Arabia. A decrease in oil is bullish, as we know that retail will benefit, perhaps ever so slightly, from lower gasoline prices which are coming down rapidly. More importantly, the consumer packaged goods companies will benefit from a reduction in raw costs as one of their biggest inputs is plastic, which is priced off of gasoline.
Now you have the sudden advantage of lower raw costs and more competitive yields versus treasurys, something that will be even more pronounced if we get a weak employment report Friday.
I am sure the bears out there will say how about the dollar? A strong dollar is bad for these companies. No disagreement, but honestly the dollar was always asterisked these last few years. If it were good news it didn't matter as much as the bulls thought it would. That's very different from gross margins which did matter which makes this oil story so positive. Even if you disagree with me, go buy Clorox (CLX) which has much less exposure to overseas markets than almost all of the other consumer packaged goods stocks. Or consider PepsiCo (PEP) which is taking radical spending action to reignite declining product lines while buying companies that will allow them to grow earnings given the millennial affinity for them.
Finally, the sell-off in the S&P 500 today will be the buy of the small- and mid-cap domestics tomorrow. Not only do they not know the difference between the Five Star and the League, they don't know that Italy has no mortgage market, no functioning government and an 11% unemployment rate. If any country needs a new government it's that one.
So, the bottom line: anything that gives us lower rates, lower inflation, more powerful banks, more purchasing power for homes and cars is something that's good, not bad. We just have to wait until sellers come to their senses and realize that the uncertainty leads to good outcomes, not bad ones.