Now where have the shorts bet and lost?
Four areas: banks, industrials, consumer packaged goods and what I am calling old tech, typically known to be personal computer or industrial related.
Where did they go wrong?
First, with the banks, hedge fund managers that believed the Fed would not raise rates figured that banks, which need higher rates, were natural pushovers. They did initially go down when they reported, but the earnings weren't so horrible and the rate hike's still within our sights, so the group failed to produce sellers.
I think those owners who still had shares simply didn't capitulate because there's so much profitability there with the probability that the government will soon allow for much larger dividends and buybacks, which had been the hallmark of the group before the great recession. Higher interest rates will just be the icing on the cake. Look no further than JPMorgan Chase (JPM), which was seen to have disappointing earnings and is now up nicely from when the news came out.
The industrials had been part of what I call the rolling bear market. Pushed down by weak China sales, hailed as dangerous by the Fed's unwillingness to raise rates because of fears of a weakening economy and victims of the strong dollar, these seemed like sitting ducks going into earnings. But General Electric (GE) reported first and delivered a spectacular quarter. Since then, we have had companies report lesser quarters, like 3M (MMM), and yet the stocks soared anyway because they were simply too cheap. I would put United Technologies (UTX) and Boeing (BA) in this camp, too. They had been bet against because the CEO of Delta (DAL), on his conference call, said there was a wide-body plane glut. That was the key for the hedge funds to pounce all over anything aerospace. In retrospect that looks to be a canard that has continued to cause the shorts to cover on an ever-rallying market.
The dollar has gotten stronger still, but suddenly it hasn't seemed to matter. There is also a sense that China is getting stronger or about to do some huge stimulus and that's buoyed the group, too, as well as the simple fact that the Chinese stock market seems to have ceased its endless cratering.
The consumer packaged goods stocks like Clorox (CLX) and Kimberly (KMB) and PepsiCo (PEP) and Coca-Cola (KO), were being viewed as bond market equivalents. When hedge funds were concerned that rates would go higher, they shorted these stocks, with the added layer of security that they would succumb to the strong dollar. But the Fed didn't raise, the dividends were bountiful and the worry about the strong dollar has diminished. And almost all beat the estimates, in part because of a remarkable decline in raw costs. The coup de grace? The fantastic number from McDonald's (MCD), perceived to be a faltering company with higher labor costs and a secular headwind of unnatural and inorganic food. Nope, too cheap, real turn. Real bad short.
Old tech had been overlooked as being too linked to personal computers. But when Intel (INTC) reported, it hinted that the long decline in personal computers may be slowing and the Internet of things has replaced the ailing devices at the fulcrum of companies like Intel and Texas Instruments (TXN), which reported an amazing number last night. Plus, the consolidation, the latest being Western Digital (WDC) buying Sandisk (SNDK) has truly helped the group as it could mean firmer pricing.
All of these changes have coalesced to make what looked like fabulous shorts that turned out to be magnificent longs and vice versa. And these sea changes, not the actual numbers, have explained many of the moves you've seen since the beginning of earnings season three weeks ago.