Strong demand is the missing elixir to this market. Among the many reasons why we have developed this vicious volatility is a belief that demand is waning in many industries just when the Fed wants to tighten.
But if demand is just fine, thank you, not falling off a cliff, then we can tough this market out. Not everyone agrees. For example, it seems the vast majority of speakers at CNBC's Delivering Alpha conference seem to pretty much write off the prospect of any robust growth in demand here or worldwide.
If you had to boil it down in admittedly overly simplistic terms, the thesis about why our markets are so dangerous goes like this: Central bankers are out of bullets, nothing's working, demand's declining, so we are headed into the unknown and lurking there is a terrible abyss of losses for anyone who owns anything -- stocks, bonds, you name it.
I judge things differently. While I have a macro world view, meaning a sense of what I think will happen in the world, I am a bottoms-up guy, a person who looks at demand by silo and makes an aggregate case from the pastiche that I can put together.
I admit that the demand side worldwide is worrisome. Not dangerous. I will save that for 2007, when central banks generated systemic risk by tightening into an economic collapse. Still, that's a lot different from central bankers trying to stimulate demand all by themselves, which is where we are right now.
We don't see big stimulus programs coming out of Europe. Those governments, led by Germany, are too tight with money. I don't know what the heck the Japanese are doing, but whatever it is, there seems to be more demand for the new Super Mario Brothers game than for anything else over there. The Japanese central bank's endless attempts to keep the yen low while buying stocks, bonds, even ETFs, seems doomed to me. Not dangerous. Just foolhardy. The demographics just don't support robust demand.
Latin America's trying. But as long as Venezuela's in huge trouble and Brazil's transitioning out of trouble, don't get your hopes up.
Two bright spots? India and, lately, Russia, good but not enough to give you confidence of a global pickup. China? We just don't know if growth is accelerating or holding steady. Yesterday, amid all the gloom at Delivering Alpha, David Faber and I interviewed a fund manager, Robert Bishop, who recommended a resource stock, Teck Resources (TCK) , which is a big coking coal company -- coal needed for steel -- and he said China's demand bottomed in the first couple of months of the year and is now climbing. Positive. Then we interviewed Joe Tsai, co-founder of Alibaba (BABA) , and he says demand's strong for pretty much everything they sell, and they are, by far, the world's largest retailer. The stock's on fire, which I think speaks louder about Chinese demand than any of the usual indicators.
Which brings us to the U.S. I find the demand story here challenged but not down for the count and certainly not at all dangerous.
How am I measuring demand? One input, the one that predominates, is the price of oil. We've been trapped in this macro world as measured by commodity pricing -- meaning that many of the bigger fund managers look at oil as the virtual thermometer of demand. Any time the price of oil drops, that, to them, is a tell that demand is waning. Any time it's rallying is a sign demand is stronger than expected.
Let me first say this is totally ridiculous. The oil price is the sum of supply and demand, with supply ready to overwhelm any demand, even demand that is 10% or even 20% stronger than it is. When the U.S. inventories drop, as they did today, you have a fleeting rally in oil and then a decline because we recognize there is still a glut. Later, as oil heads to $40 from $43, you get a reversal higher because the countries that want the price higher so they can make more money -- namely the Saudis, the Russians, the Venezuelans and the Nigerians -- spread rumors of an emergency meeting to freeze production. Works like a charm, every time.
In other words, the price of oil is manipulated, it's bogus and it has little to nothing to do with real demand that we need to calculate to make our view, even as it is the moment-to-moment choice of so many fund managers as a measure of it.
Others use the prices of metals, like copper or steel, to measure demand. They aren't sending positive or negative signals. One reason is that copper's been displaced by other materials. Another is that steel, again, is being manipulated, this time by the U.S. shutting down China and Korea, so it's an indicator of nothing. Right now commodities confuse more than enlighten the demand picture.
So what am I looking at? In the U.S., first it's employment and I'm still encouraged that employment's relatively strong. It's why I don't fear a rate hike as much as others and see the downside for a surprise one at 7% on the Dow and S&P, a number arrived at by analyzing the results of the December hike.
Next, I look at housing because housing punches above its weight. Housing demand remains strong. I have Toll Brothers (TOL) on tonight and I assume they will confirm my view, as they did on the last conference call not that long ago. When housing's robust, that means spending to fix up housing is strong and that's a big chunk of retail.
How about non-residential construction, a big chunk of any economy? I speak to several companies in every silo of non-residential, from the construction loans in all geographies to the materials needed to erect buildings, to the fixtures and heating and air conditioning and lighting and ventilation companies. My judgment: Things are pretty good.
While I don't like the automobile stocks because they are worldwide enterprises and the world isn't as healthy as I would like, the demand in the U.S. is strong, with the right kind of vehicles, SUVs and trucks selling well.
At the actual store level, it's mixed but not terrible. Casual dining's not good, but some of that is that it's just a lot cheaper to stay home because of the decline in the price of food. I believe there's also been a tamping of demand from increased health care bills.
Retailers? Hit or miss. We see strength at Walmart (WMT) and Amazon (AMZN) , which are a huge part of the retail equation. Department stores? Not great, although we got a key upgrade of Macy's M stock today. Back to school? Not bad, not bad at all. Go listen to what PVH's (PVH) Manny Chirico said on Mad Money. It's pretty darned decent with low inventories, which means less promotion, which means decent demand. (Amazon is part of TheStreet's Growth Seeker portfolio.)
And then there's perhaps the most overlooked judgment of demand: the huge and unexpected increase in the number of orders for the supposedly blah Apple iPhone 7. When you have Sprint (S) and T-Mobile (TMUS) say they have off-the-charts demand for the phone, it is an actual needle mover.
We know that millennials represent about half the consumer demand in this country, and they spend on different things than other generations. They like experiences and they like games. What can you play the most high-powered games on? The 7. How do you share your experiences best? With beautiful pictures on your iPhone. You have a billion iPhone users, at least 90% do not have a phone good enough to do those two things well.
And they are willing to spend hundreds of dollars on their phone that would have been spent on something else. Raw demand.
Now I know that all of my mosaic seems nothing but anecdotal. We want somehow for a Commerce Department number to capture what I just put together. We want some Grand Inquisitor entity to put everything together and then mind-meld with an algorithm that shows us what the economy will do given that set of circumstances.
Good luck.
We aren't going to get that level of certainty. So, I use my method, the best I can offer, and my method says we don't have enough demand to keep this market from plummeting, but we do have enough to contain the decline to levels that aren't dangerous and certainly make it worthwhile to stay the course.
