Will there be enough ammo to power this market higher from these levels? Are individuals going to come back to stocks after this incredible run? If they don't, today could be a high-water mark for the averages.
Of the many remarkable aspects of the incredibly bullish first quarter, the one that stands out to me is the public's amazing, headlong rush OUT of stocks into bonds.
That's right, the figures I have so far for the first quarter show $118 billion into bonds and $60 billion coming out of stocks.
That's an extraordinary set of statistics. How can stocks rally with money coming out so swiftly?
Some of the ammo to go higher can be laid at the feet of corporate buying. Some of it can be that sellers aren't there every day. They take breaks. The market goes higher. Then they leave again. Four of the last twelve weeks actually saw inflows so it isn't like the money does nothing but come out.
I think stocks benefited from a total dearth of new supply. The government was shut down for part of the quarter which meant that the SEC couldn't clear IPOs.
You combine no new supply with voracious, relentless buybacks and you can see how the market can rally without a lot of new cash. How voracious exactly are buybacks in general?
In just one quarter, Apple's (AAPL) third quarter, the company bought back a third of what individuals pulled out of the market. While Apple's buyback is outsized, there are many big-cap companies that come in every day and sop up supply. It's been a windfall for investors.
On Friday ride-share service Lyft (LYFT) came public. It priced at $72, promptly went to $88 and then collapsed, finishing $10 lower than that opening. It cratered further today. That's not a good sign for the stock market because there are some trillion dollars' worth of companies looking to come public and if they act like Lyft's stock and no new money comes in they are going to tip the scales to the sell side and bring the market down with it.
Sure, the market levitated today but we have to analyze how the averages went so high in the first quarter to figure out what could happen in the second and then weigh that against all the potential supply.
The best way to predict the future? Let's look at the past. Let's look at the top-five performing stocks in the Dow for the first quarter. They are incredibly illuminating.
Let's take them from the bottom up.
The fifth best performer? Exxon Mobil (XOM) , which advanced 18.49%. This move makes a ton of sense. The only commodity that outperformed the U.S. market this year was none other than crude oil. It, like every commodity, had gotten crushed by Jay Powell's intemperate comments about a multitude of hikes and traders fled oil. That drove down the stock of Exxon, the world's largest oil company.
This was strictly rebound action as it was a rare oil company that didn't bounce back. I think Exxon has more room to run because it traded at $86 before Powell went on record calling for an overshooting of rate hikes in order to cool the economy. With Powell now at odds with his own view and oil back over $61 it makes a ton of sense that the stock of Exxon should take out that old high.
Next is Apple. This one's an incredible anomaly. Apple actually preannounced a sharp shortfall in this actual quarter and, ever since, it's been pretty much off to the races, finishing up 20%. How can this be?
First this stock had already gotten crushed in the fourth quarter. It was down so severely, plummeting from $233 to $246 around the end of the year, so the preannouncement clocked the stock only to $142. Since then Apple reported a terrific service revenue number and announced that January was a pretty good month. Today we heard about price cuts on Apple phones in China. Those drove the stock down but I think it is all a misunderstanding. China cut its VAT tax which explains the price adjustment. No firesale there.
Last week's product announcements, which included an Apple credit card, could be even more additive to the high-margined service revenue stream. The more I dig into the card the more I like it. Apple's always been great at changing the experience. Remember the old cellphones and how awful they were? Steve Jobs, Tim War Eagle Cook and Eddy Cue and others combined to create a phone with a much better experience.
I think that's Apple's DNA. I don't like the credit card experience, from the baffling points -- as opposed to cash right back at you -- to wallet-card take out to the ridiculous antediluvian bills in the mail. Once again, Apple's fixing and improving on the dismal credit card experience.
Next up, United Technologies (UTX) , which rallied 21%. I think this stock soared for two reasons: a bounce back from the Powell bear market, which industrials felt more acutely than any sector, and a belief that the Chinese talks will go well. UTX has gigantic business in China, including Otis elevator and a lot of aerospace revenues.
United Technologies is splitting into three companies, aerospace, climate controls and Otis. The original split-up plan received a muted response because of China. Now we are getting clarity and it sure seems like a terrific investment if you think the Chinese talks succeed, especially because United Technologies is a way to play aerospace without the 737 MAX risk that overhangs Boeing (BA) . It's one of my favorite industrials although these split ups seem to take an awfully long time to complete.
Talk about compressed. IBM's (IBM) stock had fallen from the $150s before Powell spoke, to $106, a nightmare decline. It wiped out nine years' worth of gains. IBM's bouncing back and bouncing back hard for a host of reasons not the least of which is its giant dividend. The stock no longer yields in the 5% area -- it's at 4.3% now, but that's nicely competitive versus Treasurys with yields that have dropped dramatically.
I wish I could tell you that IBM is being boosted by the closing of the Red Hat (RHT) deal as that cloud king recently reported a great quarter that I think justified what some thought to be a very high price. But the deal's not expected to close until the second half of the year.
Finally best for last, Cisco Systems (CSCO) , so ably led by Chuck Robbins. Cisco is the perfect metaphor for what could go right in the second quarter. First, its growth is accelerating, not easy for an older tech company. Second, it is becoming much more of a service and software company, which means a much higher price-to-earnings ratio. Third, one of its key raw costs, DRAMs, are plummeting in price and this quarter you should see the benefits. Fourth, Cisco is great way to play 5G.
Finally, Cisco's got a fabulous balance sheet that allows it to buy what it wants to while also raising the dividend and boosting the buyback. The cash had been locked overseas until Washington changed the tax code to give companies a tax break that repatriate asset.
So, to wrap up, we can go higher as long as we are not overwhelmed with new supply, because I think the valuations are still too low, as the top-five stocks inform us. But this market needs a deal with China because of stocks like United Tech, which are rallying in anticipation, and most important, it needs new money, to absorb the humongous supply that's headed our way.
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