The comeback is so powerful that you have to wonder whether this rally is getting as mindless as the selloff did right before Christmas.
I think the rally "works" as long as stocks are well off their highs. I think it could fail when they start to challenge them.
Take the stock of JP Morgan (JPM) . From the get-go, unlike the harebrained, impatient traders, many of us were willing to overlook the weakness in December's trading and focus on the quarter's incredible 7% loan growth without any increase in defaults. Dimon's discussion of "pristine" lending was so soothing that it overwhelmed December's trading inactivity.
I knew there would be resistance to this position from the investors who would say "if I am this exposed to trading, I want nothing to do with this stock, I might as well own Goldman Sachs (GS) ." That was the logic that drove the stock down to $97, as panicky traders bet that we were going to see a retest of the $91 level we plummeted to back in December.
But once the call started and the well-trusted, seasoned, Marianne Lake, revealed that January was relatively strong, a nice pick-up in trading, you ran out of objections, especially when Jamie said that he couldn't care less about December's trading number. There wasn't a lot of activity for good reason: If your trading year was made, no need to muck it up -- and if it wasn't, you were paralyzed. At first, the excuse seemed too pat when Citigroup (C) gave it, but when JP Morgan confirmed it, you had to buy in to the logic.
Now, mind you, a lot of what is happening now in the market has to do with how low we were in December, not how high we were in September. If this stock were at $118, where it miraculously traded at on September 20, a fortnight before Jay Powell lowered the boom, I think it could have shed 8 to 10 points on these figures..
But yesterday's move up started when the stock was at $97, selling at 9x earnings with a plus 3% yield, a big buyback and the biggest profits ever, with about as low a loan loss ratio that I can recall. So, what the heck are you selling it for, a bunch of big hedge funds that didn't do anything in the last month of the year that are back doing something now? What's the point of selling it so close to its lows on a slightly missed quarter, if January has already become better than December?
Here's the problem, though. Without clear-cut evidence that the economy can re-accelerate, you are now dealing with a stock that will lack catalysts to go higher. It isn't like a bank can do anything dramatic intra-quarter to change its trajectory. You need a big group, ETF move, which we could get because the regionals are so compressed, coupled with a re-acceleration of trading and the end of the government shutdown to get these stocks moving back to their highs. That's asking a lot in this environment where we have a synchronized global slowdown. I don't know how else you can bring out more value at the moment -- and I like the stock. We own it for the trust.
A few points north of here, you are literally buying JP Morgan either because you think will someone will pay even more for the stock -- say,11x earnings -- or because you think the buyback and dividend make compelling reasons to own the stock in their own right. Some call that multiple expansion prospect the "greater fool theory." I say it's reality.
Which brings me to yesterday morning's comeback from the pre-opening lows. We have to remember that you can only go so far with missed numbers, and the numbers were misses, even if every other line besides trading was pretty darned good. I am not picking on JP Morgan, I could say the same thing about Action Alerts Plus holding Citigroup, too.
A few more days of rallying and we will be on quicksand -- without some actual, genuine, beats and raises. Another day like yesterday and I think we will be entering the "don't-be-too-greedy" part of the rally. That's a sobering place to be.