Some companies have to play by the rules. Others don't. The trick is to know which ones are which.
That's what this market has devolved to, a market that's bound by earnings and a virus, with both turning out to be astonishingly subjective.
Let's start with virus subjectivity. You know that no one has been more critical about how China does business than I have. That's because the PRC is a dictatorship and a dictatorship doesn't have to answer to anyone.
So if the country puts up coronavirus numbers that are false, big deal. Sure someone's head will roll, and it looks like that's what is happening to some of the hapless Party hacks who ran the government at the virus' epicenter. But the reliability of these numbers was always in question for anyone who knows the way a dictatorship works.
Yet Wall Street, in its infinite wisdom, has been trading off these numbers as if they are gospel. Traders buy stocks when the infection numbers or the mortality numbers drop and then they sell them when they go up. Wednesday night they went up big because the government got a little more truthful. But they are probably still in accurate. It's a fool's game.
Plus, earlier Wednesday, we thought things were under control because of those numbers. Thursday we think it is out of control and coming here quickly, that it can't be contained and it is every man and woman for him and herself.
I have no illusions. I, like many others, have tried to figure out which Harvard this and which Lancet that and which NIH this and which CDC that knows what they are talking about. I come out like this: Some of the smartest minds say it's already too late to stop and millions will get it in true pandemic style. They make these dire predictions, because it is more contagious than initially thought and, because, perhaps, the incubation period is longer than 14 days -- perhaps as long as 24 days -- and because it's not lending itself to cures or vaccines because, like the diabolical menace that it is, it keeps morphing into something different, making it harder to stop.
Then there's another camp that says it will burn itself out come April and your chances of getting it in America are very slight.
I come out like this: If you are worried about your health, I wish I could help you. Wash your hands. Keep them at your side. Get masks and surgical gloves. I did. I want to be ready for anything. We have fire extinguishers and chain ladders and baseball bats in every bedroom to put out a fire, escape one, or beat the bejesus out of bad guys. I hope I don't have to do any of these. I hope I don't have to don the protective clothing. And I am not going to a cruise or go to East Asia, because I want to increase my odds of staying healthy.
Suffice it to say that the numbers are subjective, the articles are subjective, the forecasts are subjective and even questions about incubation, treatment and lethality are subjective, mostly because the Chinese have stonewalled and whitewashed and made it impossible to trace and stop this demon.
But you know what else is subjective? Stocks in the time of coronavirus. In this market some stocks are bound by valuation parameters and others aren't. You just have to figure out which is which.
Most stocks are still traditionally valued. This morning Goldman Sachs upgraded the stock of Caterpillar (CAT) , saying machinery inventories are pretty low and production cuts will raise earnings down the road.
To me this is a dicey upgrade. Why? Because Caterpillar is a traditionally valued stock. Perhaps it can grow slightly faster than it used to because of inventories, but, in the end, it's bound by its end markets and it's most important end market is China. I would sell into this upgrade because I do not think it can make the number and therefore it will falter no matter where it is when it happens.
On the other hand there is Tesla (TSLA) . Here's a company that announced it is going to raise $2 billion in the market and almost immediately there are people, using traditional metrics, up in arms saying that Tesla Dictator Elon Musk just said when he reported two weeks ago that he didn't need the money. How outrageous.
I said to myself these people are delusional. The stock of Tesla isn't Caterpillar. It's subjectively valued and it should go up on the news because Musk needs more capital to meet demand. What's wrong with that? It's terrific news. What's there to be aggrieved about?
Sure enough, Tesla ultimately does rally -- remember I always said it could raise $2 billion at the drop of a hat, I just didn't know when he would do it. The rally can continue because unlike Caterpilllar, there is strong demand for the product globally.
Then there is Cisco (CSCO) . Here's a company that told you last quarter that demand is challenged for its products. So when it reports last night and says demand is challenged for its products, the stock gets clipped. It's valued by traditional, objective metrics and they simply aren't that good, so it can't rally, it has to go down, even if it is down already as is the case with Cisco.
Now let's contrast Cisco with Wednesday night's guest on "Mad Money," Shopify (SHOP) or Thursday night's RingCentral (RNG) . Both of these companies are high growth monsters. That's all you need to know. I am not kidding. You don't' even need to know more than they have quarters with unfathomable growth, because they have incredible demand. So, it doesn't matter where the stocks are when the companies report, if the numbers are better than expected, the stocks go higher, maybe much higher. Where they came from is completely irrelevant. They aren't even bound by gravity. This is highly unusual behavior and in the olden days only Amazon (AMZN) and Netflix (NFLX) were valued this way. But because growth is at such a premium especially with many people in the largest country on earth not able to leave their homes, many qualify for this new, subjective method of valuation.
There's tremendous demand for financial technology solutions. So those stocks go up no matter where they are almost each and every day. There's no real demand for just another plain old bank, so they go nowhere. There's tremendous, accelerating demand for anything cloud, so they can go up when any one of their number goes up. There's decelerating demand for oil and gas, so it seems hard to even give them away.
People don't want stocks to be valued subjectively, especially people who have been around forever, calculating ratios, examining discounted cash flows, tracing dividend trajectories and pondering correct price-to-earnings models. They don't want price to sales, they don't want enterprise value ratios and they really don't want unbridled anointed momentum. These people fear buying high and selling higher. Or not selling at all. They think you must lose money.
There's only one problem: They aren't making money or at least not as much money as those with the discipline of buying subjectively. So when the objectivists and subjectivists report their own quarters the clients take from the former and give to the latter. It's a nutty virtuous circle accentuated by a virus numbers that propel subjective stocks ever higher until the virus runs its diabolical course: extinguished.
