Relief rally or real deal?
That's what you have to ask about any rally that starts because Federal Reserve minutes come out that show the Fed isn't that likely to raise rates soon because of a global slowdown. That sensitivity to the actual, weaker data by the Fed triggers the kind of upward move we are having because it contradicts prevailing wisdom that the Fed's now on autopilot to take rates higher.
Here's the problem with believing in this rally. It's terrific if you are a bull to know that the Fed isn't going to do something stupid to try to tamp our economy. It is fabulous to know that the Fed is turning a deaf ear to those hedge fund managers constantly calling for much higher rates to teach reckless borrowers a lesson. It is fantastic that they don't have the same desires of some of the more strident hedge fund managers, which seem to be to trigger a nasty recession that drives stocks down and creates havoc in the heavily shorted junk bond market.
But the problems that many companies are facing right now are beyond the purview of the Fed, which makes almost all rallies of this kind one-day wonders that are better to sell into than to buy. I think that will be the case again after today. Yep, I think this is a relief rally that will now depend on the earnings themselves to sustain the upward action.
So what's vulnerable and what isn't?
I remain very concerned that the whole commodity complex and anything that touches it is still on the ropes. We saw a huge turn today in the oil and gas stocks that are in the S&P 500, but I think that's because of the powerful pull of hedge fund managers who had been shorting the index because that had become the quickest and easiest way to make money.
The collapse in the actual price of oil, continues, however, and I think that these stocks are just being given a nice reprieve because their earnings estimates are too high.
I know it is counterintuitive, but I believe that the transports that reversed could resume their downturns. Why? Because I think that many of these companies are involved in travel and leisure, and just like the Fed can't control the price of oil, it can't control the principal reason why these stocks have been going down -- mainly the fear of the spreading of the Ebola virus. Until the virus is perceived to be in check I believe you will see declines in bookings of all sorts of travel-related activities. So those stocks will most likely be for sale again tomorrow when we assess the impact of the news of the Dallas man who died of Ebola. I think that would have been a major focus of the market as it was hitting these stocks hard before the Fed released its minutes.
Third, it is hard to trust the banks when the Fed says it isn't about to turn on a dime and raise rates. The regional banks rallied today but they have been in a world of pain and I don't think I heard anything different that is going to help them.
Normally when rates go as low as they have -- and have they ever gone low again -- there is a pick-up in residential lending that helps the regionals. I have seen the kinds of new, very interesting products that the banks are offering right now for home buying and refinancing. They aren't as attractive as you could have gotten in the early spring of 2013, but they are darned attractive.
Here's the problem though. They are really only being given to people who have FICO scores north of 700 or can prove without a shadow of a doubt that they don't need a penny of the money. I am getting pushed these deals because I have the money to buy property but want to keep it invested in other things. I have guys knocking down my door to give me money. But that's because I don't need it. If I needed it, I don't think they would let me have a dime of it. Why should they? Think about it: If the loan goes bad these days the borrower has the upper hand. He can't be easily evicted easily anymore and the bank has to be worried that it screwed up, not the borrower. And if the bank sent the loan to Fannie Mae, that means nothing in terms of protecting the banks' rights. It might have to cough up the loss anyway. No wonder housing remains at levels normally associated with recessions.
I don't know how much retail I can trust. Sure we got terrific numbers out of Costco (COST). But we got bad numbers out of J.C. Penney (JCP). Yesterday, the Container Store (TCS) collapsed. Today Wal-Mart (WMT) looked great. One theory I have? We are seeing the denouement of Sears (SHLD). It seems like it could be on its last legs, and the winners are everyone who looks like Sears but does a better job than Sears, namely Wal-Mart and Costco. This retail move seems zero-sum to me.
Finally we have the international companies, the ones that are based here that sell goods overseas. Any companies in this cohort has been hammered mercilessly and I think that's because of the Ford Motor (F) syndrome. If you go back to the beginning of the year you will see that Ford pretty much looked like the stock you most wanted to be in: huge business in America that was taking share, a gigantic turn in Europe, a strong upward surge in Latin America and an improving business, albeit off a low base, in China. Plus, we had a strong euro and not that strong a dollar, so currency would be a tailwind.
Now everything has changed. Europe is in the grips of a war of sanctions among Russia and the European Union and the U.S. Europe's going back into recession and Ford will be dragged down with it. Latin America has become downright unstable. The sales there are hideous. China, because of weakness in Europe and a decision by the government to crack down on mindless consumerism, has become the anti-paradise for luxury goods. Not great if you are selling expensive baubles of any sort. The dollar's become a monster headwind. All of this makes people feel that Ford's 3.5% yield can't protect you from a big capital loss on your stock. Slightly more than a dollar in dividends doesn't' make up for what could be four dollars in lost capital.
In fact, the only bond market equivalents that are working are those where the dividend has little chance of being adjusted down, the consumer packaged goods and the utilities even though they don't have much growth. A market that usually thirsts for growth suddenly craves safety and why not? The S&P 500 is up 6% for the year, so who needs to be a hero? Who needs to go find the next big oil stock if a poorly performing Clorox (CLX) or Coca-Cola (KO) gives you a dividend and puts you on the new high list.
Now the rally today does show you that when you get oversold buyers do come back in. But I think these buyers are defeated hedge fund managers who are counting on the Fed to do the wrong thing and raise rates and then get disappointed when the Fed says it won't happen.
Tomorrow we will go back to worrying about earnings, and, for once in a long time, I think those worries will be justified for many companies that we are used to hearing about beating and raising estimates. There's just too much the Fed isn't in control of for that to happen anymore.