Is the Treasury secretary of the United States right when he says tax reform is baked into the market and we could be due for a fall if we don't get it?
I think Secretary Mnuchin is trying to get Congress to stay focused on what matters, a more competitive environment for American business. But I think he's quite wrong when he tries to pick the direction of the market based on one possibility, a possibility that has been greatly discounted by skeptical executives who don't look to Washington for any real tax relief.
Washington has, for years, had an inflated view of itself when it comes to passing legislation that helps the economy. It tends not to happen, and when it does, it helps only a portion of the economy, like the health insurers that got sweeteners to have them come in and write policies for the Affordable Care Act. They were huge winners under President Obama and now they are even bigger winners over President Trump because they can't really be defeated if you are going to have them be part of the mix to pay health insurance bills. They win if they stay in and they win if they stay out. They are the keepers of the healthcare system that is busting the budget and making it so we can't really do anything to help other businesses become competitive because that would take additional spending and neither party seems up to the task. The Democrats are calling tax reform a gift for the rich and the Republicans a budget buster.
You want to buy stocks that do well because of Washington? Just go buy United Health (UNH) , which escaped the ACA and made a ton of money, or go buy Centene (CNC) , which is in the ACA and is making a ton of money. The government lets healthcare companies raise earnings per share and everyone else suffers, including many consumers, because it is too expensive to be in the plans for the average working person, and if you aren't in some plan, healthcare costs will only continue to be the leading cause of bankruptcy among consumers.
So I say forget Washington's help and instead focus on self-help, the help that strong companies and a fickle market give you on a daily basis.
Take the banks. I have been adamant that this group is so strong that every time rates go higher they will benefit as it socks in the notion of a Fed rate hike, which is nirvana for these companies. I just finished pounding the table on the outrageous selloff in Citigroup (C) and told you Morgan Stanley (MS) was great and there was nothing wrong with Goldman Sachs (GS) . But I didn't think even Goldman would come roaring back today.
Later tonight we will have the CFO of IBM (IBM) come on Mad Money, and here's another one that the market decided to almost unilaterally pan because of 22 straight quarters of down revenue. But the company's sales and earnings are inflecting and that's code for a stock about to be re-rated to the upside, a concept I have struggled mightily to introduce to you. Suffice it to say that you have a C student becoming a B student and everyone sees that trajectory and wants in before it becomes an A student. But IBM and the banks are classic non-tax-reform names. They have been electric because of the yield curve and strategic growth imperatives.
In fact, the weakest stocks in the market, the retailers, the restaurants -- look at that Chipotle (CMG) sink -- and the cable and entertainment companies are precisely the ones that would be winning if there were real tax reform. Instead, they are the losers and if the Treasury secretary would look at what's winning and what's losing, there would be no shock here. IBM has been a 15% percent and change, give or take a percent or two, for years and its stock is having the biggest day in 15 years, a total finger poke in the eye for anyone who thinks tax reform is holding the market in the balance.
And here's an oddity. One of the biggest losers on tax reform would be a company that has gamed the tax man endlessly, General Electric (GE) , in a way that has left the analysts cold and the owners steamed. Let's hope that nonsense will come to an end on Friday when we see how badly GE's really doing and, if anything, its taxes should go up if it wants to report earnings like every other company instead of the GE way, which has done a great deal to throw you off the scent of the real core earnings power.
I will say this, though. Washington's shenanigans do create some pretty terrific buying opportunities. There are tons of sellers lurking on any North Korean event. There are always people getting anxious about the president's off-the-cuff comments about the calm before the storm or drug companies getting away with murder.
But those, too, have been great opportunities to buy, as brief a window as you may get to do so. You were able to buy the stock of Johnson & Johnson (JNJ) at a lower price as well as those of Merck (MRK) and Bristol-Myers (BMY) and Abbott Labs (ABT) . The only one that can't seem to snap back is Allergan (AGN) , once a darling of the drug group that caught a bid from Pfizer (PFE) that would have amounted to a double from this level before the previous Treasury secretary passed a regulation that he could not pass just a few weeks ago, wrecking the deal. (Citigroup, General Electric, Abbott Labs and Allergan are part of TheStreet's Action Alerts PLUS portfolio.)
Now Allergan's stock has no floor to speak of, having lost 60 straight points because of a patent cliff for a dry-eye drug that could cost it a billion and a half dollars in sales next year, even as it has seen its market capitalization decline by almost $20 billion. I think it's a buy, but I've been wrong and I bring it up because it's important to remember that not all selloffs are buying opportunities.
The real irony? Actavis bought Allergan for more than the combined company is selling for even as it then turned around and sold its generic drug business for an outrageous sum of $33 billion to Teva (TEVA) , and the latter threw in 10% of its company's shares. They've been crushed, but the craziness of the loss of one patent for a big company like Allergan is beyond me, which is why we told club members of Action Alerts PLUS we would buy more here if we could for the trust. Call me Mr. Butcher Block.
There's nothing like consistency in what can't lift on up days. Oil is over $52 a barrel but there's no real upward move in the stocks because crude remains trapped by endless futures selling by our own oil companies desperate for cash flow. So lower retail sales and lower oil prices remain the great conundrum. You would think that if oil were cheap, gasoline would be cheaper, and we would all have more money to spend, but the market simply looks at Amazon (AMZN) as a company that fries all retail except storm-related rebuilding companies -- think Home Depot (HD) -- and the dollar stores, which seem to be part of the reason we need tax reform. The shoppers don't have enough money to go elsewhere. The stocks of those household-products companies we told you to avoid the other day are going down or doing nothing, too.
So where are today's investable bargains that do bounce back? I see the defense stocks getting clocked. They have been some of the most dependable stocks every time they get clipped because it's not like world peace is breaking out: Buy the stocks of Lockheed Martin (LMT) and Raytheon (RTN) and Northrop Grumman (NOC) . I like how the disgruntled sellers of Netflix (NFLX) are letting you in down 10 points from where it was the other night. And the airlines are stalled out again, which makes for another buying opportunity.
The only thing I don't want you to be thinking about is tax reform. At one point, it was baked into stocks, the ones that are being clobbered because they stood to gain from it. Otherwise, with the exceptions of the long-running bear market in retail -- including anything sold in the stores, especially food -- oil and gas and a couple of hated drug companies, the discounts are rare, and when they happen, like IBM yesterday or the banks last week or the defense stocks today, you have to take them.
Join Jim Cramer, CNBC's Jon Najarian and Other Experts Oct. 28 in New York
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