I don't know how else to put it. This darned market marches to the tune of Avril Lavigne. You see, on a day like today it's got me thinking "why'd you have to go and make things so complicated."
I mean really, only this market would somehow confuse the huge break plummeting gasoline is giving 317 million Americans and act like that's bad news. Gets me frustrated. Instead of rallying, you fall and you crawl and you break and you take and, frankly, you look like a fool to me.
Let's consider what's happening here with this dramatic decline in gasoline.
First, the consumer.
Let's say you fill up your car twice a week and it cost $80 when oil was over $100, which was the case for a considerable amount of time this year. It now costs about $60. You are saving $40 a week, which counts out to $2,000 a year if oil stays down at this $76 level, something that looks increasingly likely given the speed of the velocity of the decline and the surplus supply still hitting the market.
How's the stock market feel about that cut? Mixed-to-negative for most of the day.
Now, imagine that the federal government decided that this economy needs a boost and sends out $2,000 checks to every family in the country. I bet the stock market would soar.
The first $2,000 comes out of the hide of the shareholders of the oil companies. The second comes out of all of us in the form of higher taxes down the road. The first produces what could be an annuity given the excess oil supply isn't about to go away. The second is simply inflationary and involves printing money to get the job done.
Then how the heck would the stock market like the $2,000 rebate more than the $2,000 gasoline tax cut?
The answer is, well, complicated.
First, there are 16 states, many of them with sparse populations, that have been big beneficiaries of the oil renaissance in this country. There are 34 states with much more population that are takers of energy. But oil and oil-related employment is responsible for a large percentage of the overall job growth in the country. That's a negative and it will make the stakes unusually high when we get the non-farm labor report on Friday.
Second, the oil stocks have been a huge leader of the bull market. While they are only about 10% of the S&P, these stocks punch above their own weight because they have been such visible winners. They are concentrated, wild traders that create an impression of weakness in the U.S. economy. Plus, there are plenty of hedge funds that insist on selling the S&P 500 whenever oil's going down because the logic's simple: oil wouldn't be coming down unless economic activity is slowing. The only problem with this thesis? It is totally wrong. How's the market really done the whole time oil's been going down? How about gone to all-time highs? I say to bears, "Chill out, what you yelling for, lay back." It's all been done before and you are mistaken about the overall impact of lower oil.
So, now let's talk about the rest of the market and what happens with lower oil and why it is such a mystery to so many.
First, some things are obvious. Oil's the biggest swing factor in the profit or loss of the airlines specifically and the transports in general. So, they hit their all-time high. Makes sense; it's just a windfall for these companies. It is why I like Spirit (SAVE), Southwest (LUV) and American (AAL). They will report huge quarters, all, because of lower fuel costs.
Second, lower oil is deflationary, which pushes up the value of bonds, creating low yields (so low that the utility stocks, not true beneficiaries of lower fuel, since few use oil, go up huge and they hit all-time highs). I know it seems odd that transports, which roar when the economy is strong, can hit an all-time high while utilities, which usually shrink with fast growth, also hit a high -- I told you that this market can make things complicated -- but a decline in oil's pure good for both.
Now, let's talk consumer. The wealthier consumer doesn't really feel the $2,000 a week. The wealthier consumer doesn't save the $40 a week and then go buy an expensive Michael Kors (KORS) handbag, something that was quite obvious after today's drubbing after a disappointing quarterly report.
But the vast majority of people in this country do regard this additional cash as a vast windfall. Where will it be spent? Again, complicated. We haven't seen a lot of studies about where this money goes. But we do know that during the halcyon days of Darden (DRI), the former CEO would tell us that lower gasoline prices translated directly into higher sales for Red Lobster and Olive Garden. That's why it makes a ton of sense why all of the restaurant stocks act so well, although it doesn't hurt that Red Robin (RRGB) and Bloomin' Brands (BLMN), reported terrific quarters today. I think that the extra change really does help chains like this as it does Jack in the Box (JACK), Chipotle (CMG), DineEquity (DIN) (that's IHOP and Applebee's) and Panera (PNRA). It doesn't exactly hurt Starbucks (SBUX) either, especially the drive-through ones!
Retailers similarly should benefit. Here, again though, is how the Avril Levigne dictum plays out. We heard today from executives at Michael Kors that one of the reasons why sales didn't meet expectations is that mall traffic is down. We heard the same thing from Starbucks last week. So the mall retailers took a hit. Perhaps Amazon (AMZN) should have rallied, but the amazing numbers by Alibaba (BABA) last night is causing that stock to run and run hard, pulling money from Amazon's stock like a magnet. Make sense. You would have to expect that outcome when a fast-growing Internet commerce with huge profits stacks up against a not-so-fast-growing Internet commerce company with little-to-no profit.
Still, I think, again, the market's trying to be cool and it's looking like a fool to me. Discretionary income gets spent and the money goes to retail, and I wouldn't let Kors dissuade me.
Finally, how about the biggest beneficiaries? The consumer package goods. The biggest expense line for most of these companies is energy, whether it because of the ingredients or the packaging or the gasoline used to get the stuff to the stores. It's so much bigger than the wheat or corn or cardboard or toothpaste whitener. It makes sense that Clorox (CLX) or Procter & Gamble (PG) or Kimberly-Clarke (KMB) roar. You ever look at what goes into manufacturing a disposable diaper? I felt like coming out here, blackening my eyes like Avril and wearing a diaper to prove the point, but I have promised myself I'm never gonna find myself flaking. No no.
Of course that leaves a whole bunch of areas. Industrials are caught up in the economy-must-be-weaker-or-oil-wouldn't-be-down theorem. Healthcare stocks are case by case. Tech? I think that more tech gets bought because of disposable income, but that's way too complicated for this stupid market. Banks? They need higher interest rates to move up, so I get that they languish. .
But all in all, the vast majority of companies benefit from lower oil. It's just too darned complicated for most of the hedge funds who trade every minute. Too bad. No wonder they keep missing the big picture.