The problem is the funnel. We just don't have enough sectors in the S&P 500 to buy on a Brexit decline. There are issues everywhere, in almost every group, and these concerns are playing havoc in what would otherwise be a compelling time to buy, given a 3.5% decline last Friday.
First, let's face it: we are only back to where we were a little more than a month ago. That's not much of a discount, when you consider that the S&P 500 sported a 19 multiple going into Friday.
You need the market to come down more to get more enthusiastic. We are at 2037 on the S&P and 17,400 on the Dow. We've been bouncing around these areas ever since oil bounced.
On Feb. 11, the bottom, we were at 1829 on the S&P and 15,647 on the Dow.
However, let's understand this: oil was at $26 back then and there were many other, more important concerns than Brexit right then ¿ namely, the huge losses that the U.S. banks could take on major resource companies if oil didn't rally. It was entirely possible that we could have seen $300 billion in losses from these energy loans alone.
Those are now largely off the table as so many oil companies have re-liquefied during this bounce.
So I do not want to put this selloff in the context of that one because, if anything, that one was underplayed. Oil is indeed going down here now, trying to stay above $45, but that's a far cry from the $26 bottom.
No, the issue's not credit. It's not systemic, here at least, and I doubt there, for that matter.
The issue is that there isn't much to buy. Consider the make-up of the S&P 500: 20% is information technology, which has the highest percentage of euro exposure of any sector. Then there's finance at 15%, and all of finance is linked to European finance, if not because of the difficulties facing their banks then because our banks were pricing in a couple of rate hikes that now seem off the table.
Fourteen percent of our S&P is healthcare, and here we have some hope, particularly domestic hope: think UnitedHealth (UNH) or McKesson (MCK) or Centene (CNC) for that matter. These may be the bargains the futures give us. I fear the Humana (HUM), Aetna (AET), Anthem (ANTM), Cigna (CI) merger maniacs because they are way ahead of themselves if these deals collapse given that they are shouldering the burden of a lot of subpar exchanges that they haven't been able to get out of -- unlike United Health.
You know my abject fondness for the Bristol-Meyers (BMY) of the world, and I want to throw in Johnson & Johnson (JNJ), both of which are high and could get hurt by a strong dollar, but remain the most coveted places to be.
Consumer staples, oil, industrials, materials? There's 30% that's suspect. I can make a case for some of the consumer staples if they would come down to the point that their yields are more competitive to shrinking bond yields. But they sure aren't there yet. Hershey (HSY), by the way, was up on Friday. So even though they've run too much, they are loved. We will see how loved when General Mills (GIS) reports Wednesday and ConAgra (CAG), McKesson and Constellation (STZ) print Thursday.
Oils? We are trapped in the $45-$50 conundrum and I have little faith in the group when it's ticking down. It should continue to do so because of the stronger dollar. Industrials will be kyboshed by both psychology and the dollar. That's because you are not going to get the word "recession" out of anyone's head at this point. The whole situation is too new and uncertain. You want to build out your banking business in London? Do you need to move? To Scotland? Paris? How about we just hold all spending. Materials never hold up with this set of circumstances.
The toughest, because it is all land mine, is the domestic consumer spend cohort. You want to buy the stock of J.C. Penney (JCP), as I heard someone recommend last night? I think: Amazon (AMZN). No thanks. You need non-Amazonable stocks, which means TJX (TJX), Dollar Tree (DLTR), Dollar General (DG) and, well, maybe Five Below (FIVE)?
Finally, the utes and the telcos. What can I say. They work, they aren't done. We are very interested in Comcast (CMCSA) for the Action Alerts PLUS portfolio and we would love to own some Verizon (VZ). These never come in. Only a real bad Brexit will let that happen.