Why did we turn? What happened? A couple of things.
First: Brexit was, in the end, a uniquely European event that had only one consequence for the U.S. and that was our rates went down despite strength in employment. That's pretty much an ideal combination because you need employment growth to "make the numbers" of the domestic companies. The best example? The second wind in the housing stocks. Look at the stock of Lennar LEN. It was unable to get this high on its own after an excellent quarter, but it was able to burst out of the range on the numbers last week. Could it put the lie to the "peak housing" thesis articulated by Doug Kass?
Two: the Fed went on hold beyond where you would expect because of the unexpected turmoil in Europe. The truth is we would have had a rate hike without the chaos, even as employment -- nothing else yet, but employment -- would have been ample ground for the hawks to argue cogently for a hike.
Three: because there was no Fed rate hike, the dollar didn't go berserk -- a much feared post-Brexit story -- something that on the eve of earnings could have been dreadful. Year over year the dollar is unchanged vs. the euro. Emerging currencies have not fallen apart except Venezuela. (Kimberly Clark (KMB) now joins Clorox (CLX) in fleeing Venezuela, which is a godsend.) So perhaps the "constant currency" refrain will be behind us and we have apples to apples for once.
Four: the Labor Department's non-farm payroll number was so strong on Friday that it is hard to see a recession on the horizon. If anything, a pick-up may be in store from the previous months as the expansion of credit in the month of May to 6.1% may be indicating. That's how the RTH can break out of its slump. The employment number initially caused a sharp spike in rates, but then it came down as foreign money sought the higher yields of Treasuries. That's something that has to happen if you are a European investment manager because no one gives you money to lose money. You just aren't being a fiduciary.
Five: you can cut the bearishness, as measured by money out, with a knife. The redemptions two weeks ago were thought to be the straw that broke the equity market's back. But, two weeks later, any money manager would have to be concerned that he left the table too soon. The retail investor seems like history, now. Sadly that's something that happens closer to a bottom than a top.
Six: it's hard to underestimate the shorting that went on after Brexit. Perhaps the fearful and panicky money managers who came on air and wrote endlessly that Brexit meant the end of the world were actually just taking no action whatsoever. After all, George Soros said the pound could fall dramatically -- it has -- but he wasn't short it. He said he made it up with other shorts, but one has to wonder has he covered or is he losing on the equity front. He's short a monster amount and the copycats are, too. One has to think that there are at least small trading shorts everywhere and the pain must have been immense on Friday. There's so little liquidity, so no brokerage house is going to offer any short any stock, even to start a covering position.
Seven: takeovers didn't cease; they accelerated. In fact, the Danone (DANOY) $12 billion bid for WhiteWave (WWAV) proved that foreign buyers weren't fearful of our markets. If anything, they still want in. They have cheap money, so why not? The deal was a stroke of genius for Danone because it also eliminated its own threat of being taken over. In the meantime, does anyone think that Mondelez (MDLZ) is done with its attempted acquisition of Hershey (HSY) ? I think this is an extraordinary amount of takeover activity for the month of July, especially post-Brexit. Oh, and keep an eye out for a bidding war for Medivation (MDVN) . If there are two foreign drug companies interested, does that mean we have put a bottom in the junior biotech stocks? Can you stay short BioMarin (BMRN) or some others? Or is it correct to cover? The pipelines of Big Pharma do run out. They still need the biotechs as farm teams.
Eight: the bond market equivalent stocks had pretty much run out of gas when they hit below 3%. You didn't want to pay up here for Procter (PG) or a Clorox. But with 10-year Treasuries below 1.5%, is there any choice? Again, who is paying a manager for that kind of terrible risk-reward? These stocks have been integral to the bull for so long but they ceased to be part of the solution about six months ago. They are back.
Nine: tech, which had been so hideous simply stopped being hideous. That doesn't mean it's on the way up. There are only a handful of stocks from this group that has made it to the 52-week-high list. But some of the bigger ones, notably Apple (AAPL) , Microsoft (MSFT) and Intel (INTC) have given the appearance of a floor, and all disappointed last quarter out. The Microsoft takeover of LinkedIn (LNKD) shows how desperate these larger techs are to grow. Could that be the lone takeover? Seems unlikely. It is true that Micron (MU) , Qorvo (QRVO) , Skyworks (SWKS) , Western Digital (WDC) and Seagate (STX) have all acted horribly. But what if this is all there is to the downside? Someone will be attracted to them.
Ten: China. I know, the cognoscenti are worried about a slowdown in Chinese manufacturing, a decline in the yuan and a sense that China's actual growth is much lower, hence the dramatic slowdown in Macau.
But last time we had a growth scare it bottomed with the Baltic Freight index's rise. The index has been on a tear, which usually means more stimulus from the Chinese government. Yes, we will have to hear how overstretched they are and that their reserves are low. But remember, they are low vs. everyone else's, not on an absolute basis.
Eleven: as much as I am sure many other countries are as sick of the tyranny of the EU as Britain, I don't think that there will be a mass exodus given how punished the banks in Britain are -- not to mention the declines in the equity (but only in the equity) -- of European banks. Instead, I think the EU becomes less friendly to immigrants and helps out in the needed recapitalization of the most bedraggled banks. I do not believe at the end of this admitted crisis, the end of the oldest bank in the world, Monte Paschi, is going to happen. Italy's way too "corrupt," meaning too chummy, to let that happen.
Finally, the election is making itself more certain. While capital may fear Hillary Clinton, she could be a more consensus and business-friendly president than Obama. She has friends in business. He had NONE. Nobody wants to say it out loud, perhaps because they fear losing the ratings Trump brings, but barring some sort of change from reality TV to actuality -- and believe me having been on "The Apprentice" multiple times you are getting that "reality" Donald Trump -- he's just taken himself out of the running. I mean you have to do some work to be president.
All of these are adding up to a level of insecurity on the part of sidelined money --there's no new money coming in, just sidelined money -- so you get the surge that wasn't expected. Now earnings begin, but the instinct will be to buy, not sell, given that shortfalls simply haven't produced disastrous stock results after all.