It's day three of the hangover from last Friday's strong employment number, and it doesn't seem to matter what is said or done, this market wants to go lower.
Why is this?
Let's go over what's really ailing the market.
First, we, once again, are building in the future rate hike. I am old enough to remember what the market's been like in the 10 days leading up to a rate hike and you would get this kind of action. We have all been conditioned to hate rate hikes and to recognize that from now on we will be fighting the Fed, that the change is visceral. Those who want to get out before a hike are getting out and you can't stop them. The strength of Friday's employment number was simply too great to ignore and the knee-jerk way that portfolio managers always react to these things -- which is to dump stocks in advance of something that could be perceived as very negative -- even if there are a lot of ideologues who think "is it the right time" is gripping this market and making it very difficult to own stocks.
I can't blame anyone from wanting to sell. It's been so long since a hike that there's probably no major fund manager who wants to have big exposure to stocks going in for fear the selloff will be monstrous. Plus, who knows if they say they will be taking more action soon. Who knows if they say it is imperative to have multiple hikes. You know that's the discourse even if it isn't the truth. So build in the losses we must until the event actually occurs.
Second, we have this commodity obliteration that never lets up. The relentless nature of the selloff makes investors believe that precisely when the Fed is going to raise rates, the economies around the world are falling apart.
This is not a silly view. While it is true that many countries would kill for the growth that China has, we know the growth is not good enough for the major companies that sell into that market. The commodity declines are so visible that many old-timers think the Fed has to be nuts to raise rates because commodities don't lie. They are used aggressively when the economy is expanding and they are used much less when it is contracting. You are supposed to raise rates when the economy is expanding rapidly, but commodities from oil to copper to nickel to iron are saying we are contracting quickly. I know it seems nuts, but the commodities are saying the world will be in recession in 2016 just when many expect the Fed to be on auto-pilot to keep raising rates.
Many of the emerging-market countries are really in a lot of trouble. Their currencies are getting slammed and their markets are going down. That's never a good sign, even as it was amazing how weak the dollar was. It's not good news that the market ignored something that had been viewed as positive for so long.
Plus, the industries that have been strong -- autos and housing -- have stocks that are taking it on the chin because multiple rate increases will hurt their earnings. Fact of life. Get used to hearing cutting numbers housing stocks, cutting numbers autos. That's what happens after a rate hike.
Third, we have to talk oil. Yesterday, Kinder Morgan (KMI) cut its dividend in a very big way from 51 cents to 12.5 cents a share. Kinder Morgan is a gigantic company run by a man, Rich Kinder, whom many people, including me, had tremendous faith in. All last year, he repeatedly told us he was going to be raising his dividend regularly. It was pretty much gospel that he knew what he was doing. He was perhaps the most revered oil man in the country. When someone in his position could be this wrong about the health of the oil and gas markets, and take down so much debt to capitalize on the growth of the industry, we can only sit back astonished at how wrong so many others might be.
Maybe Kinder will be one of only a handful of people who have to slice those dividends so aggressively. But this was devastating to many wealthy individuals who bought this stock, and has left a whole cohort of income-seeking people just crushed. When someone you believe in so much screws up, you can't even imagine what the other guys are doing.
Now, Kinder's stock went higher but that's only because there had been so much speculation that the company might have to raise even more debt or try to issue equity or, literally , not cut the dividend enough to please the bondholders. The latter really control the company now and they were appeased, so the stock went higher. But it's down 61% for the year and it's shaken the confidence of those individuals who relied on these stocks for their high fixed-income value. What a disaster. All fossil-fuel stocks are innocent until proven guilty, and while I am not as negative as others, I don't see a need to own any of these stocks and do want to sell them but only when they bounce. I never want to sell into a maelstrom. That's panic. And I don't panic. It's not a strategy.
Fourth, we've had a big move in a bunch of tech stocks and without new information they can't keep going up every day. I have been talking about a scarcity of high-growth stocks as personified by FANG: Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL), now Alphabet. But we have now endured endless price-target increases from analysts on all of these stocks on no real news. Stocks just can't continually climb on no new data, even these stocks. They are all getting progressively more expensive with no reason to raise estimates. Plenty of people have profits in them. They want to lock them in before the rate hikes. Again, who can blame them? (Amazon is part of TheStreet's Growth Seeker portfolio.)
Finally, some of the best of the best are screwing up, or at least appear to be. One of my absolute favorite retailers since I started this show, Costco (COST), reported subpar earnings last night. Like with Rich Kinder in oil, there's a belief that if Costco can't make the numbers, who can? Maybe nobody? So retail, which, again, should be benefiting from lower gasoline prices, comes down again. My charitable trust owns Costco. We are itching to buy more of it. The company has a long history of coming right back after a miss. But the stock had been up almost 20% going into the quarter, so it has to join the hoi polloi of retailers in price declines before it snaps out of the tailspin.
So profit-taking ahead of a Fed that might raise rates multiple times despite weakness in the economy makes a ton of sense. When it is rational to sell, who can criticize it even as the selling ignores all the value creation like that of DuPont (DD) trying to merge with Dow (DOW), something that shows you that managements are not going to take their stocks' lack of performance lying down. (Facebook, Google, Dow and Costco are part of TheStreet's Action Alerts PLUS portfolio.)
To me, it's a tough moment in that the trader in me would like to do what so many big institutions are doing, locking in gains, while individuals are licking their wounds in stocks like Kinder Morgan. But the investor in me says stocks have had a big move. You can never blame anyone for taking profits as you never want to turn gains into losses, especially when many stocks have become expensive if their earnings estimates are going to be cut.
Still, I say that if you pull out now and the Fed doesn't hike or it raises rates and says it is going to wait a considerable time to be sure it didn't damage the economy, you are going to have to scramble back into the market, perhaps at a level that might be lower than this one, but maybe one that's higher because so many have stepped aside or taken profits. Unless you are a professional trader, you aren't that good and won't be able to get out and get back in. Even many pros aren't that capable. So why should I advise you to do it?
Take some profits if you want. Lock in some gains. But remember almost all the damage rate hikes cause to the stock market happen before the cuts. And if you sell into this moment, you are simply joining the crowd on the way out betting you can get back in without a problem. My experience is to say, good luck, I bet you won't be able to do it.