I always enjoy a market that makes sense. It allows you to be creative in your thinking and make some judgments that can be very lucrative, especially when the risk seems a little washed out by multiple down days, including days like this that opened horrendously but then rallied.
What do I mean by making sense? How about the fact that all the slower growth around the world and the negative manufacturing data we are seeing in this country have made our interest rates remain low. When rates are low, housing becomes more affordable. When housing becomes more affordable, people switch from renting -- where rents are about the highest they have ever been vs. owning -- to actual homebuying. When you add that banks are now willing to lend a little bit more with less of a down payment to people who actually need a loan vs. those who could pay for a house in cash, you get a miniboom in housing.
Now, we have long known that something like this had to happen because we are back into new household formation mode. For multiple years after the Great Recession, young people either lived at home single or got married and lived with their in-laws. Now they are buying, which is causing a scarcity of homes. In some cases, homes have increased in value while they are on the market, which is extraordinary, but I have seen it with my own eyes in Brooklyn, where I live part time, with a new and exciting development by Toll Brothers (TOL) on the waterfront.
So, again, in a market that makes sense, you can actually buy the stocks of the homebuilders and expect to make money. DR Horton (DHI), a maker of entry-level homes, has led the charge with an appreciation of 23% this year. But Toll, which I have been pushing relentlessly, as well as Lennar (LEN) broke through levels that would have been unthinkable without this plunge in rates.
What's extraordinary to me is that this move is happening right under the noses of people who should know better but keep waiting to get their signal from the Federal Reserve. You don't do that if you are a serious investor. You tune out that talk entirely and you figure out who does better in the environment you have and the hand you are given. The answer? The homebuilders.
Now go one derivative further. You have to fill that house with goods when you buy it. The old way is to go to old-line department stores and get furniture. These days there are a host of opportunities: Amazon (AMZN) and Wayfair (W) come to mind. Now Amazon, the company, is on the hot seat because of an exposé by The New York Times about working conditions. Excuse me for thinking this is not that important to the stock, and moreover, nothing that's new. (Amazon is part of TheStreet's Growth Seeker portfolio.)
I remember watching my colleague David Faber's amazing documentary that covered the rapacious nature of Amazon, which puts up factories in one-horse towns desperate for employment, and thinking, holy cow, this company's like a slavocracy. So I can't bemoan what I knew about Amazon's work practices from Faber's report. But what I can say is that it's a winner in household formation. So is Wayfair, which is finally taking a breather after a solid quarter, one that, judging by the 42% short interest, wasn't expected. Mind you, when I see that short interest, it reminds me of the just-acquired Zulily's short position that drove the stock to $72 from the $22 price when it came public. Today it was acquired by Liberty Media (LINTA) for less than $4 under that.
Now this market does like to take a theme and run with it, which is what makes owning Home Depot (HD) and Lowe's (LOW) into their respective quarters tomorrow and Wednesday so difficult. But do not forget that at a time when every single trading partner seems to be hurting, there's nothing wrong with owning the stocks of two domestic stalwarts.
Everyone wants pure plays that sell into these two companies, which is why Fortune Brands Home & Security (FBHS) and Masco (MAS) remain on the new-high list for what seems like the duration. Kitchen and bath remodeling makes sense if you are trying to invest in your house rather than just lose money in it. But Sherwin Williams (SHW), PPG (PPG), Whirlpool (WHR) and Stanley Black & Decker (SWK) all make sense and they are still well off their highs. Sure, they all have more international than you might like, but their raw costs are coming down rapidly. They make sense to me.
You know what else makes sense to me? The airlines. This one-time leadership group was decked by a slowdown in travel caused by a boisterous dollar and a run to $60 in crude. The dollar seems toppy to me unless the Fed raises and oil's lost a third of its value since these companies reported. Don't forget, they trade on supply of routes, too, and I think we've put that big supply of new capacity behind us. That's why a Southwest (LUV) or Delta (DAL), my two faves, can keep running. American's (AAL) got legs, too. I am worried about deal integration there, but CEO Doug Parker should be able to figure out how to merge American with US Air in a pretty seamless fashion. I just wish it had happened earlier.
Those are all obvious rate- and gasoline-related investments. However, there's a second tier of investments that jump out at you on days when rates are this low -- the higher-yielding utilities and real estate investment trusts. I was shocked to see the run ConEdison (ED) has been having after bottoming last year about this time. It's gone from $55 to $66 and I would say it has higher to go, but it yields only 3.89%.
The truly amazing run over the last week is from the oil and gas master limited partnerships that were laid low by a couple of bad operators, and more important, a couple of really bad shareholders who borrowed money or were too heavily concentrated in the contingent. They seem to be done blowing out their positions now.
Lower rates signal to many that inflation is tame. That's when you buy the most aggressive growth stocks, ones like Netflix (NFLX) and Tesla (TSLA), both of which are complying. I find Netflix to be a play on more household formation as well as the worldwide bargain of non-cord entertainment. Tesla's move is the product of an insanely high price target slammed on its stock by Morgan Stanley (MS). When you put a $611 price target on a $243 stock price, you are going to get a rise out of the thing even if it is based on the notion that one day in the not-too-distant future Teslas will be part of the shared economy, maybe even as self-driving vehicles. Whatever. It worked. (Morgan Stanley is part of TheStreet's Action Alerts PLUS portfolio.)
Never forget that low inflation means there's more money for the highest-growth stocks as those earnings in the out years gain in value in a tame inflation mode. So once more back to the biotechs with gusto.
You know what else is heartening. The way that Disney's (DIS) been able to craft a better story with its discussion of the new acreage devoted to Star Wars rides. Anything that changes the narrative away from "some subscriber losses," the three most devastating words in the media lexicon, is a total win. Comcast (CMCSA), parent company of CNBC, has been able to change the narrative because of a red-hot movie schedule. The others? Not enough diversification.
Why is the making-sense trade working after such a negative opening? I think that's simple. The gloom has, once again, gotten too palpable. At the same time, the ugly news from overseas wasn't ugly enough to derail us. All in all, that's what it takes to move the needle these days, and moved it has.