We are getting a formula about what's working and what's not, and it is fascinating to see it play out because it is so disparate and ephemeral in nature. In other words, it makes sense, but it only makes sense for a few days before the market loses interest and is on to the next.
For weeks now, for example, this market hated the industrials. The United Techs (UTX) and Honeywells (HON) and the Dovers (DOV) and the Boeings (BA) and the Eatons (ETN) and PPG (PPG). The market hated them so much that they got too over-hated. Then out of nowhere, a couple of things happened and the big portfolio managers who determine prices simply switched their orientation entirely. (Boeing is part of TheStreet's Trifecta Stocks portfolio.)
First General Electric (GE), in a one-two punch, got the endorsement of Nelson Peltz, the longtime and long-term activist and the only one of his kind who has allowed you to beat the market if you bought even after you learned he had gotten involved. True to form, this one's been going higher from that. Then on Friday, we got General Electric's report and it was stellar, no flies and Wall Street lapped it. (General Electric is part of TheStreet's Dividend Stock Advisor portfolio.)
That was the signal that there's been an appetite for this trashed segment of the market that's been roiled by the bear for months now. Since then, we have seen so-so quarters from Honeywell and United Technologies -- vs. expectations, a pre-announcement to the downside with Eaton -- a huge disappointment. Only PPG truly proved to be better than expected. Today, though, we got excellent numbers from Boeing and General Motors (GM), and they reinforced the fact that this group has simply gotten too cheap to ignore.
You come to me to peel back the curtain and let me tell you what is happening. Because of worldwide weakness, reinforced by the Federal Reserve's decision to keep rates on hold, portfolio managers got underweighted in this group, meaning they owned far fewer industrials than they should. This, coupled with the fact that many portfolio managers are warming up to the notion that China might be getting better -- the day rates to ship bulk goods have gotten stronger, the consumer's starting to buy cars again and the Shanghai index seems to have gotten out of free-fall mode even though it was down last night -- has meant they are frantic not to miss this reranking of the group.
At the same time, there is absolute hatred going on of the once-loved drug and health care stocks. The money that is coming into the industrials? I think it is cascading, not slowing, but actually cascading out of health care. Ever since some hedge fund manager turned pharma exec took pride in jacking up prices for some old drugs, this cohort's become just too dangerous to own. It's an election year and no one likes to champion the drug business. It's almost as unpopular as the banking business when it comes to an election.
So companies that are identified with dramatic increases in drug prices, notably Valeant (VRX) and Horizon Pharma (HZNP), are being bashed pretty much every single day. So are the health care maintenance organizations and Big Pharma. As long as the Republicans seem in disarray, these companies will become whipping boys because Hillary Clinton, the putative nominee of the Democrats, is a decided opponent of price increases. Without price increases, this group's done, finished, just left for dead. So getting any sort of upside going on a sustained basis, even for biotechs and their lifesaving potentials, just isn't possible.
What's not flowing out of health care is flooding out of oil and gas and retail. I mention them in the same breath because what's good for retail is supposed to be bad for oil and gas, but it sure isn't playing out that way now. If you watch the oils today, there's something micro and something macro out there. The oil glut continues, with an even bigger inventory buildup that's being dented by increased driving or industrial use. At the same time, a new prime minister in Canada has pretty much killed the Keystone pipe on his end, Arctic drilling seems kaput and, as Carrizo (CRZO) CEO Chip Johnson said on Mad Money last night, many of the oil companies, big and little, are running out of money and unlikely to get a lot of new credit to drill. Hence why he did an equity offering. The saving grace is M&A, like the takeover by Halliburton (HAL) of Baker Hughes (BHI). This consolidation has made competitor Schlumberger (SLB) the company to own, and I think its shares have bottomed.
Restaurants are a disaster because of one call from Chipotle (CMG) that said costs are going higher, especially labor costs, but also real estate and food costs and they are cutting right into the bottom line. The whole group's getting crushed but the only one with any real momentum at the moment is McDonald's (MCD) because it is so cheap and it has lagged so badly.
I think it is a buy because the problems at Chipotle will prove to be fleeting, but you aren't going to get a bottom overnight. There's too much stunned money out there. It didn't help that only a week ago Wal-Mart (WMT) dropped the bomb of lowered earnings estimates, but the market is starting to make a judgment that the problems of Wal-Mart aren't spilling over to the rest of retail. That's the only way that both L Brands (LB) and Costco (COST) could be hitting all-time highs. Believe me, if Wal-Mart was going to be giving away apparel, hard goods and food, there would be no way those stocks would be up. Too much overlap.
Tech's hard. The high-growth techs have been roiled by the bear market that's taking apart anything that's perceived as too expensive. Remember, this is a rolling bear market and it strikes at the drop of a hat. Some of it is because Tesla (TSLA), the most highly valued growth stock, has run into a wall aided by a negative Consumer Reports piece, as well as Netflix (NFLX), which has been dropping because of a shortfall in domestic sub sign-ups.
But some of it is the joy surrounding recent takeovers that will take out capacity. Today's no different as Lam Research (LRCX) is jumping on its acquisition of KLA-Tencor (KLAC), greatly consolidating the semiconductor capital goods business -- they make the machines you need to create and test new semis. There's also an amalgamation going on in disc drives and flash as Western Digital (WDC) is buying SanDisk (SNDK). Yep. A struggling disc drive maker is combining with a struggling flash maker. It's happening not a moment too soon because Intel (INTC) is moving aggressively into flash and has the money to do so.
Not all mergers in tech are working, though. Dell's buy of EMC (EMC) looks stunted because the business of the latter, including its once-fast-growing VMWare (VMW) division, seems to have suddenly hit a wall. There's still trepidation about serial acquirer Avago (AVGO) but it seems to be making a stand. So is big acquirer NXP Semi (NXPI). No such stand is being made at Skyworks (SWKS) yet, though. (Skyworks is part of TheStreet's Growth Seeker portfolio.)
Finally, the market likes non-controversial growth wherever it can find it, although there aren't many places to do so. There's traditional growth, where Starbucks (SBUX) and Nike (NKE) continue to be loved. And then there is slow growth, but still growth, coupled with a dividend and that's Clorox (CLX), Kellogg (K) and Hormel (HRL). (Honeywell, Costco and Starbucks are part of TheStreet's Action Alerts PLUS portfolio.)
All I can say is these moves are breathtaking. The sleep-at-night health cares are giving you many a sleepless night. The hard-to-handle industrials are acting fabulously. And everything else? It's just a rolling bear where you may get mauled and you may not, depending upon the day.
