One of my least positive set-ups is when there are huge cross currents that make it so people will sell on the same news that might otherwise make them buy.
For example, most of our businesses do better when rates are lower. Only the regional banks, which lend money at rates that they can't make much from, actually get hurt by lower rates, but they will loan and try to make it up in volume. So lower rates are almost universally a good thing. And while there are plenty of people who bemoan the low rate for savers, there have been ample opportunities in the stock market to make a lot of money so I can't buy into that negativity.
When Ben Bernanke created this bold new world he made it clear that money could be made without being reckless in the stock market. It just seems as if most didn't believe him or they would have stopped rolling over their CDs and cashed out of their bond funds years ago.
About 85% of our companies do better with lower oil and gas prices. Of course, the boom in the country has come from the ability to tap our energy sources and still make a lot of money, and much can still be made at $88 on West Texas crude. Those companies had a windfall when oil was north of $100, but there is plenty of pipe being put in to at least get the oil companies the actual West Texas price instead of the heavily discounted glut price out of Cushing, so it isn't like there's been any real cutback necessity yet. If you want to drill offshore you are getting rates 33% lower than this time last year for shallow water drilling so that more than makes up for whatever hurt you are getting from the decline in oil.
The price at the pump has been so terrific for consumers that it has even opened up the possibility of viable housing further away from the job locus. If you recall, leading up to the Great Recession many homes were being built far from urban centers, but they became unsaleable when immigration was curtailed and gasoline increased in price. This is truly a commuters' rejoice moment.
It is true that lower commodity prices haven't yet trickled down to the supermarket level, but knowing how competitive our supermarkets are, if prices for raw goods are going to come down then those lower prices will be passed on by aggressive private labelers who need to curry favor with supermarkets. The supermarkets know how to cut prices and they will get the better of the suppliers, which are now, with the exception of the organic and natural companies, truly at the mercy of the retailers. This will be a very big theme this fall.
Currently all of these positives, and they are huge positives, are obscured by machines that tell portfolio managers that they need to lighten exposure to all sorts of industries because they will miss their numbers in these scenarios. Others have decided that even if short-, medium- and long-term rates are going down on their own violation, the Fed has to take action anyway to show it is tough. In other words, the empirical inputs mean nothing, what matters is that now the fun is over and it is best to do it when there's still a chance to do so.
What this obscures, of course, is that the rest of the world's strength is plummeting so quickly that we may just have to accept that there is a collaterally positive wave happening to U.S. companies. Is that so bad? Some of these bears think we just don't deserve to make as much money as we have and there's some sort of stop watch connected with it. I come back and say that after the Great Recession's destruction it isn't too much to ask for a prolonged period until banks feel more confident to lend -- they are still being prosecuted for what often looks, to them at least, as bad lending, so they would rather not do it.
I can't underestimate the clawback nature of the mortgage market and how much it has hurt the housing business. In the old days a bank made a loan and sold it to Fannie Mae (FNMA) for securitization. The bank thought its work was done. Now if the loan goes bad when it is in Fannie's hands the banks presume they are on the hook. That issue has stifled banks to the point where they would just as soon not lend to prospective homebuyers unless they can afford not to borrow. It was awfully hard for me to find a loan for a beach house even as my main house has a very small balance still on it -- one that I could have paid down this year but I chose not to because the rate is so low. But to get that beach house loan from my usual sources I would have had to extinguish my home loan. And believe me, I had the cash to make good on the house and the loan to value was fabulous for the banks as was my willingness to put down 35%.
It just didn't matter.
But to go back to the set-up, when you have these immense positives going for you and all we hear about is how weak the economy is and how these signals are showing it will get worse, then we are in some prism that will not allow a bull to win. A bull now has to hope that he owns a Nike (NIKE) or a FedEx (FDX) and that's really about it. Not only that, but the analysts have turned with a vengeance against stocks, often after they would expect to have bottomed. The viciousness of the downgrades lately on the agriculture stocks and the oil drillers after they have come down so far is pretty darned classic. What value do they have?
It's funny, but when I peruse the stocks that are at their 52-week highs I am shocked to see Coca-Cola (KO) there. It doesn't have the best yield or the best growth. Its product isn't proprietary any more. It doesn't have any real earnings power. It's in the very challenged consumer product goods segment.
But it has no natural enemies and a very good friend in Warren Buffett. It is regarded as a go-to company when the world is slowing. We have seen that even when a country puts a soft drink consumption tax on soda, sales get hit and they come right back up.
But unlike the stocks that are now being relentlessly hammered, the oil drillers, aerospace, earth movers, autos, technologies, and anything else capital goods, Coca-Cola has no reason to cut numbers. No reason to raise, no reason to cut, with a blessing from Buffett about how it handled the pay package issues.
And, even if Coca-Cola is totally hedged against increasing commodity prices --meaning it doesn't get the benefit, either -- it is perfectly situated as the ultimate stock for cowards and right now cowards are winning everywhere we turn.