You want a market where there are lots of ways to make money. That's a healthy market. It gets unhealthy when there are too many ways to make money or not enough to do the job.
We aren't yet in the upper extreme and we left the abyss of bad times after a two month stretch last year, in what looks to be the shortest recession ever.
You don't need me to tell you when we don' have enough that's working. That happens when employment is really weak and the Fed isn't cognizant. We started getting awful hiring in February of last year and went over the precipice but the Fed pulled us back and it's been pretty darned terrific since then.
Which brings me to the "too many ways to make money" issue and how we will be skirting it, not yet but we will, and how getting a little more defensive as we go into the spring won't be such a bad idea. I put it like that because when we have as many successful methods to make money we run into people taking down too much debt because everything seems can't miss and every move seems like a super cycle.
That's when things go bad. Not now. Then. What signs are we looking for? I am going to give you first, what are the ways people are making money and then give you how they have historically run out over time.
First way is the opening trade, the post-nest, which is about people getting vaccinated and the crisis being put behind us. I have stuck by my guns that there will be a vaccine glut in the second quarter and they will be looking for arms to jab, wherever those arms may be. There may be some arm wrestling but it will happen. That's why we see relentless moves up with the restaurants as well as the second and tier retailers, think L Brands (LB) , Macy's (M) , Footlocker (FL) , and Kohl's (KSS) taking off.
I have been adamant that the best opening trades are Disney (DIS) and Boeing (BA) . I am waiting for Boeing to announce some big orders. No one is waiting for Disney to report. They are all buying ahead of the February 11 earnings report. Why don't people care? Because if you had to diagram one chart of what will happen when we open it is a trip to Disney with all of the trimmings. They will be ready. Can you imagine what 2022 will look like with the combination of brick and mortar and Disney Plus?
Second theme that is working? The housing theme, the de-urbanization of America. We are going to go back to the cities eventually but the hybrid work place is here: central office a couple of days a week, Zoom office the others. Every homebuilder is booming and so are all of the parts of the home food chain.
Third theme: industrials. How can you not own some industrial with the world's markets rallying. Every industrial I follow is flying. Not too late to buy Honeywell HON or Linde (HON) , the industrial gas company, which we have this evening.
Fourth theme: energy. Despite all of the EVs coming down the pike, short-term there are concerns here about a stop in drilling because of Biden - remember under Trump you could drill anywhere. Biden wants solar. Biden wants wind. He doesn't want oil. So oil will grow more scarce. At the same time the world still runs on oil so it will until, well, more in a moment.
Fifth theme: Banks, when you get to the point that there is enough economic activity that longer interest rates are a little higher than the short rates that the Fed is keeping down, you get a shape in the interest rate curve that swells banks' bottom lines. I like Wells Fargo (WFC) a lot here and I think it is the cheapest of all.
Sixth theme: alternative to Wall Street research. We have a new group of investors that is really like a throwback to when we first got 401ks, except this is individual stock picking ruling. These are investors who do their own work and often find ideas that look like the next Tesla (TSLA) or the next Apple (AAPL) or Facebook (FB) or anything else that's been a winner. Included in that is actually anything Elon Musk touches, including bitcoin which Tesla bought as a cash alternative: $1.5 billion of it, not small change. Again, I am in agreement. If you are going to take bitcoin in trade, as Tesla now will, you can own some for your treasury. Dan Schulman at PayPal (PYPL) would say two thumbs up.
The merrymen, as I call the Robinhooders and anyone else who is a new enthusiast, also stumbled on the overly shorted stock of GameStop (GME) and took it to the hedge funds, one in particular, that was betting the bad numbers will continue. They might but the sheer bedlam caused by the realization that there wasn't enough stock for sale if something good happened at GameStop, gave the alternative to Wall Street research crowd a huge win. I think this alternative to Wall Street research is amazing and positive provided only one thing, it is not done in a pump and dump style. That's the law. Everything else is about the need for better speed to settle and less margin, more on that elsewhere.
Finally, the seventh theme: SPACs. Yep, these special purpose acquisition companies that all seem to work out. CNBC has an amazing two SPAC set of those born and those that morph into new companies. They show big gains. Don't fight the SPAC. That's today's watchword.
Okay, those seven heavenly ways to make money. What are the seven sins to watch for.
First, we don't open as we think. We get a new set of cases. The South African variant takes over and the vaccines are less effective. I don't really fear this but I don't like what's happening either because didn't we all feel at various times, because of then President Trump's insistence that everything was beyond control? Oh, and without stimulus the retailers will take a hit.
Second theme: housing. dramatically higher interest rates - much higher than the 10 year at 2% will hurt the homebuilders. They always do. Especially if the Fed raises rates on its end that it controls. Real downer there.
Third theme: the stretched valuation of the industrials. Don't look now but these stocks, known to be value plays, are already insanely expensive if employment doesn't pick up and businesses don't snap back. They can go higher still but only with real earnings growth.
Fourth theme: energy. Good now but it's because of OPEC discipline. At what point do the Saudis stop limiting production because it is emboldening too much drilling in the U.S. That's not been the case yet, but it will happen soon and when it does the group will be awful. We are at $58. It wouldn't surprise me if the tap opens at $60.
Fifth theme: banks. They are great as long as rates don't shoot too high. That cools business even if they make loans at higher valuations. Again, not yet.
Sixth theme: alternative to Wall Street research runs out of good targets. There aren't many more GameStops out there, stocks that are overly shorted, that don't deserve to be. We need better systems and more trust here or we will hurt too many merrymen, a real issue.
Finally the seventh and most deadly sin: all of these companies with no earnings or big losses that are being sold on the basis of revenue projections including the SPACs. These vehicles are exciting, and are in the most Tesla-like areas for the most part. They all seem to have a mission. But since the celebrity SPACs started in the last few weeks this seemed like a real good idea. Now it just seems excessive. There will come a tipping point where companies based on non-existent or next to non-existent sales, not earnings, get to be too expensive. We are not there yet.
Two messages: there are seven heavens and now you know the sins they can spawn. We'll be watching these seven like a hawk. So far we are in the clear. It will not always be that way.