Every day I hear derision about this market. Every day there are analysts questioning its staying power or rebelling against the valuations or pointing out how the earnings haven't been there or the revenues haven't grown or a host of other ills.
Today is no different.
I like to look at this market through a different prism, mainly how it, like all good bull markets, ignores bad news and focuses on good news. This is a market that is a glass half full and that colors everything.
The best way to look at this is to ponder the Dow Jones Industrial Average, the new Dow, with some terrific, but frankly, disappointing names when it comes to earnings. The idea of the exercise: to show you how a bull market really works as so many people have forgotten what they are like. I am not talking about the faux bull market leading up to the crash. That market was led by China, not ours, with the minerals, the coals, the fertilizers, the steels and heavy capital equipment stocks leading the way.
The real bull markets are almost always rotational in nature and have endearing qualities like perpetual silver linings and innumerable buying opportunities that must be taken as they will soon disappear.
Now, before I get started with a one-by-one look at the Dow stocks that disappointed and the bull cases that were immediately made for them, let's just deal with the reality of what's going on here.
After the 1987 crash people grew skittish about any rally. They were convinced that another crash lurked right behind it. That led to every two-bit rally being shorted and a preponderance of really, really smart people who hated the market. They despised each advance as being illegitimate and questioned the staying power of a market totally oblivious to rallies. It was almost as if it was heresy to even grant the market a respite from criticism.
For me it was very trying. At my hedge fund we had made our name being 100% in cash for the crash of 1987, something that Karen Cramer had insisted on as she hated the tape and made a judgment that we were going to get killed. Given that the week before the crash was one of the worst on record -- something that people often forget about -- I had been itching to do some buying. But I backed away in the face of her crash admonition, which was, by the way, something quite contrary to what all of the supersmart people I dealt with were thinking.
A little less than a year later the stock market started to advance. The summer was ending, stocks had stabilized and they were rallying on nothing in particular (in fact, nothing at all, and I was deeply suspicious of the advance). If it were based on nothing but a belief that things could get better, then it was a rally I wanted to short.
But Karen Cramer said that I had no business shorting it because the market wanted to lift. It had chewed through a lot of supply and there simply weren't a lot of willing sellers. You had to pay up if you wanted stock.
This was total anathema to me. I mean, what the heck did supply and demand have to do with the stock market going higher if the advance were phony?
This was where I learned one of my major lessons that led to a dramatic outperformance for my hedge fund. Advances aren't phony if they are broad based and take up stocks of companies that aren't even doing that well at the time.
That's exactly what happened, and I look back and am glad I swallowed my pride and got back on board because the forgiveness zone and what I called the era of good feeling lasted for ages and people fought it tooth and nail, and they were, in a word, wrong.
That's how I feel about people who fight this one. There is a tremendous dearth of supply out there, in large part because of the endless buybacks that have taken in so much stock that when you get a price break, it's the only time that enough stock comes in for sale for an institution to take a swing. They seize the moment like I did in the fall of 1988 when everyone hated it so much.
So, with that background, let's consider the state of the Dow stocks that blew it and how they are doing today.
Perhaps the most disappointing of Dow stocks is Caterpillar (CAT). Here's one that's done absolutely nothing this quarter after missing the numbers and guiding down big time. But doesn't it say something that it's done nothing? I think that's this market to a tee and this morning the company gets an upgrade from Bank of America based on a bit of a specious call about power systems stability. The simple fact is that this one's well behind the market and is therefore a terrific catch-up story. And it will, despite endless execution errors and very high inventories around the globe.
Next is McDonald's (MCD). Here's one where the air was thick with naysaying, a missed quarter, no real growth, lots of soul searching. Well, guess what? There was also lots of buying and the stock is now up $5, to $99 from $94 after it reported the existential crisis quarter. This is one where people just say, hey, give it a chance, they will get it right.
Then there's Merck (MRK). The company totally blew it, gave you a no real growth outlook and it's been fantastic, tallying to $48 from $45 and it seems like it wants to go higher still.
Microsoft (MSFT) had a severe miss and miserable guide down. Now you can say that it's rallying because CEO Steve Ballmer's retiring. I say that if business were horrendous that wouldn't be happening. It's another case of a gigantic buyback with short supply, just like Merck and McDonald's.
Wal-Mart (WMT) just gave you a hideous number last week. Remember? Turns out to be a terrific buying opportunity and you would be up a couple of bucks if you had chosen it. I don't know the circumstances about why CEO Mike Duke retired today. I don't even care. What matters is the stock's higher after a panned quarter.
No one liked the Visa (V) quarter except the buyers, who used a rare decline to get in to this incredibly-well-run secular winner of a company that is still riding the paper-to-plastic revolution. It's not often you even get a discount for this one and the six point decline was a terrific entry point, as it is only two points from where it reported and I sense it's about to take that price out.
Chevron (CVX) missed, quickly dropping three points on what looked to be some less-than-healthy production growth and some not-so-hot refining margins. Now that it is nicely above where it blew it, we have to be thankful for the entry.
Remember the woe-is-me Goldman Sachs (GS) quarter? Apparently most people don't because the stock's had a $12 move from the $158 level it fell to after the huge disappointment. What an opportunity that was.
How about when Disney (DIS) reported a quarter about which the analyst community had plenty of negative things to say. That stock had dropped two points from the night before when I did Six and Sixty and by the close it was actually up and it's continued the trajectory ever since.
Even Coca-Cola (KO), with its self-described disappointments managed to rally a couple of points from its report.
In fact, only IBM (IBM) and Cisco (CSCO) haven't bounced back and I think that's because both are experiencing some real challenges to their businesses. These two companies are so proud and so insistent that everything's terrific that I will just let these two facts get in the way of their story. They are the only two Dow stocks with bad earnings that have not been able to mount significant rallies. You draw your own conclusions.
So, here's your bottom line: in bull markets there are silver linings galore. There are comeback kids. There are glasses of both the half-full and rose-colored variety. That's still one more definition of a bull market that's been forgotten within the negativity and the insistence that everything good can be placed at the feet of the Fed. I think it can be placed at the feet of the buyers, including the companies, which have been the biggest buyers all along.