Is this what the market looks like when the bond market is closed?
Or is this what it looks like when interest rates have peaked?
I always let the stock market itself tell me and right now it is saying "this is what happens when rates have peaked."
What do I look at when I make these kinds of generalizations?
I have a checklist. It starts with a look at companies that have just reported because they are the "control" so to speak, meaning that we know how they have done and there is no guesswork.
That means we need to look at PepsiCo's (PEP) stock. Last week it reported what I thought was a very good quarter with some terrific organic growth - best of the large packaged goods stocks. But it was crushed. The question is, if PepsiCo's quarter was so weak why is it going up today? Simple? It's more of a rate play than we realized. With a 3.45% yield, PepsiCo's been in a battle with the bond market for investors. Why be in PepsiCo, the theory goes, if the ten year gives you about the same return?
The answer, of course, is that the yield has nothing to do with the big portion of why you want to own PepsiCo. You want to own it for price appreciation.
That said, if rates are peaking, then you might want to buy PepsiCo for its combination of both yield and capital appreciation.
I think that you should score one for rates peaking with Pepsio's run here.
Second: Ventas (VTR) . The real estate investment trusts have been a disaster of late because they are not able to compete with the ten year. The stock of Ventas is going higher and that's all about a story that earnings might be getting better. It hasn't mattered until today. That means the issue is rates. As long as rates are going higher then people don't want to own Ventas. Stabilized rates and you see what we see now.
Third: McDonald's (MCD) . I am not hearing a thing about how business has gotten stronger for McDonald's. If anything we are supposed to believe that their wage costs have gone up to stay with Amazon (AMZN) . I think that's ridiculous. Amazon is NOT the federal government. Amazon does NOT control wages in this country. So we have to ask ourselves how in heck is the stock of McDonald's going higher? I think the answer is simple? Rates may be peaking and with a 2.6% yield and a good stream of appreciation this might be a good level to start a position.
I think people should also recognize that higher wages can't be passed on by smaller business just larger ones. That means McDonald's could be a long term winner against small businesses being shuttered.
Then there are the banks. They need longer rates to go higher so they aren't paying you on a CD much higher than there was a year ago. But the loan rates are the same and, worse, there is less volume. That's not so good for banks. It's also a sign that rates may be peaking.
Now, where could I be wrong about a peak in rates? First the long-dated asset stocks, namely cloud and chip stocks act terribly. If you think that rates are going higher you sell the cloud kings, you dump FANG. That's what is happening.
Amazon's being crushed because inflation has come to its own business plus it is viewed as the ultimate long dated asset. The way to erode the value of long-term assets is to fail to beat inflation. That means the Fed needs to be even tougher.
When you see favored stocks like Adobe (ADBE) , Workday (WDAY) and ServiceNow NOW down badly, that's an ETF being used to short high growth stocks. Again, that's a "rates have to go higher" thesis. I just checked in with ServiceNow and it couldn't be doing better than it is. Very bad sign that rates have to go higher.
You could get granular here. A bullish analyst this morning cut numbers for Facebook (FB) , taking 2019 down to below what the company might earn for 2018. That's disastrous. You can't have a growth stock with down year over year earnings.
Facebook is one of three companies that Wall Street now has earnings estimates which show negative year over year returns, the other two being Ford (F) and General Motors (GM) . That means this company should have huge multiple compression.
Against that is the fact that the company has now gotten down to a 20 multiple on next year's numbers and I don't know if it can go much lower. If you want to give Facebook a market multiple - a little ridiculous given its historic growth rate - that would put the stock down to $144. If it gets the same multiple as the autos, you are talking about $125.
Given that the stock is in the $150s it doesn't have far to go to a market multiple. I just don't believe it can get to where the other companies that could have down earnings year over year.
And speaking of granular, check out Square (SQ) . This morning we got a research note out about how Square should be more worried about how its balance sheet and the risk it is taking on with loans to small businesses. I think this is a canard. Having dealt with Square personally I know that they make loans against what they get at the register. No one has the call they have on a small business. I am far more concerned about the loans that Goldman Sachs (GS) is giving small business through its Marcus division, which we learned today is being scaled back by new management at Goldman Sachs. I say that's very good news because Goldman Sachs is a high network individual shop not a small lender and as much as I like the concept of helping smaller businesses, algorithm driven or not, it is not Goldman's expertise.
Still, if we put all of these together we have something that's a bit of an unholy mess. The soft goods say rates have peaked because of a slowdown that 's coming. The high growth stocks say the Fed's not done, and it is willing to throw us into a recession to stop inflation or rates will go much higher. And Square and Goldman are saying that if rates go higher we will have credit risk.
So bets are being made all over the place. The jury is out. And while I am not saying "when or where it comes back thinking nobody knows." I am saying that the best conclusion from the evidence at hand is that rates are not done going up yet but when they get to where they have to go we are going to have a slowdown that will be regarded as stagflationary and that's the recipe for further downside.
