We keep confusing things. We keep thinking what's bad for them is bad for us. Today was no different, as our stock market got clocked at the opening because of the weakness in Japan where there was a second straight quarterly drop in GDP, enough to trigger an official designation of recession. That's right, after the Japanese government has pulled out all of the stops, it doesn't seem to matter; growth is just too hard to come by. But by mid-morning, a wave of buying came in to take advantage of the decline and we've held steady ever since.
Now, I get the overseas weakness. As had been the case for many years, the ripple effects of Japan were felt throughout Europe, where growth seems non-existent and can only get worse because of Japanese weakness. That weakness then infected the overnight markets here, as has been the case for years and years, and everything's drenched in red ink at the opening. It's that selling that's proven to be just plain stupid, because soon after the selling wave hits our shores, the real situation kicks in --the positive situation -- the situation that's unique to America and America, alone, in this world.
First, unlike say Japan, our capitalism doesn't stand still. Oil's been coming down, plummeting, so what do you do if you are an oil services company? I think you take advantage of all the short-term thinkers out there and you strike. That's exactly what Halliburton's (HAL) doing with its remarkable deal to acquire Baker Hughes (BHI) for $78.62 per share, quite a premium to the $50 and change price of the stock last week. Did Halliburton overpay? I don't think so, as BHI traded at around that price five months ago.
Now I know many think that the Justice Department could stop this deal. I know that I did on Friday when I first heard it, if only because these two compete in so many areas. But Halliburton publicly said it is willing to give up a quarter of its revenues to get the deal done and has agreed to pay Baker Hughes a remarkable $3.5 billion break-up fee, which shows you the company's level of confidence in the deal's getting done.
This is an amazing deal for Baker Hughes and for Halliburton, although the latter is getting slammed more than 10% because of all of the stock that has to be issued to complete the transaction. I actually prefer Halliburton's stock at these levels, simply because it is being overly punished for some real wisdom if it can take advantage of this decline and make a move.
The important thing here? Halliburton must believe the decline in oil is temporary or it would never do this deal. It will create a powerhouse that can go toe-to-toe everywhere against Schlumberger (SLB). That's exactly what's needed for Halliburton shareholders.
Then there's the Allergan (AGN) deal. The huge bid by Actavis (ACT) for Allergan, $219 a share in cash and stock, more than $110 from where David Pyott urged people to buy the stock on Mad Money last year, is an example of immunity, meaning the immunity from an economic downturn that Actavis sees as it buys Allergan. I know lots of people think that Allergan stands for frivolity, meaning the desire for people to use Botox to look young, and a worldwide slowdown is devastating for these guys. In reality, Botox has so many therapeutic uses that it's only beginning to be tapped. It's a terrific deal for Actavis, hence why this stock is rallying instead of being hammered as you would expect. Again, freed from the pull of world events. I'll have more on this one, including an outpouring of respect for what Pyott's been able to accomplish, later on in the show.
The Allergan bid magnifies anything positive in health care. Regeneron's (REGN) working on an anti-cholesterol formulation that could be used to lower heart attacks, something that Merck's (MRK) been doing with its breakthrough Vytorin drug. We got evidence from Merck this weekend that its drug has a positive effect, and that trends Merck up but also pushed Regeneron higher.
Not long after we read about these two bids I was struck by the wave of negative email I got about both of them. I thought this was ironic because we saw just this very morning that the biggest overpay of the year, Tyson Foods (TSN) purchase of Hillshire Brands, seems to be working out astoundingly well, as that stock was one of the biggest percentage gainers of the day after it reported a monster upside surprise. Talk about a very American deal producing very American results.
We've got plenty of ethnocentric themes at play today.
Cold weather here pushes up apparel plays that have nothing to do with Japan or Europe and V.F. Corp. (VFC), PVH Corp. (PVH) and Deckers Outdoor (DECK), the maker of Ugg boots.
The domestic housing plays continue their merry ways, being led by Whirlpool (WHR) and Sherwin-Williams (SHW) not even waiting for domestic retailers Home Depot (HD) and Lowe's (LOW) to report Tuesday and Wednesday. The homebuilders continue their subtle rally that started last month when mortgage originations spiked because foreign markets put downward pressure on our interest rates.
Which brings me back to my original and prevailing thesis: What's bad for them might be good for us. Ever since Europe began to slow and European Central Bank President Mario Draghi decided to try to jump start the continent's economy, our rates have gone down to levels that were never supposed to have occurred when the Federal Reserve stopped buying bonds. According to people who are so much smarter than I am, rates should be about at 3% instead of 2% and change. But it didn't happen. If rates were just set domestically, then I believe the brilliant hedge fund pundits would be right. But they aren't, and many of these macro geniuses just missed the whole ball of wax.
Their weakness is our strength.
We have so many companies in this country that don't have much economic exposure at all -- including the giant health cohort which is rife with takeover activity -- and have no overseas business, so they are natural safe havens from a Japan or a China or a European nation.
Their weakness is our strength.
The lower oil prices only serve to ignite the economy if they translate immediately into gains at the pump. The declines we have seen here aren't as magnified in non-dollar denominated countries, namely all those that are debasing their currency to stimulate trade. So we are getting the real benefit of the declining price. Not only that, but our domestic oil companies continue to pump like mad so there is no sign that, short-term, we are going to have a lift in price. We are still at a point where it pays to drill if you think that there's a pipeline coming soon, which is meaningful as all other forms of transport get prohibitively expensive $10 lower than here.
The ultimate takeaway: Our airlines keep flying high as, unlike overseas, they have more traffic, more filled seats and more calm labor situations. That's how they keep going higher.
Their weakness is our strength.
I think one of the biggest mistakes being made by money managers this year is the failure of parallel thinking. The bearish managers, those responsible for selling our market, say, this morning, off of Japan, are quite adept at fomenting reasons to sell the S&P 500 index, even as only about 15% of it really responds to international trade. But they don't seem to understand that there are gigantic pools of money overseas in those same challenging areas anxious to get out of their faltering currencies and into a stable growth market. In other words, they are anxious to invest here and they have the firepower to take advantage of any dip that occurs.
That's why I say we have to stop viewing whatever happens overseas as a tragedy for us. There will be geopolitical events that slow us down for certain, and I still don't trust the Ukraine-Russia situation, not when President Putin walks out of a G-20 session pre-photo-op, but we have to understand that the fund manager in Japan isn't sitting there and saying "woe is me, our country's an awful place to invest in."
He's saying, go transfer $10 million worth of yen into greenbacks and buy me anything that moves with any sort of yield at all because "we gotta get out of here if it is the last thing I do." And believe me, here's the bottom line: They will keep up that buying until things get better. Or maybe, more realistically, if things get better, which could be a very long time and a very large amount of investment.
