Macy's has the most advanced Web business of all apparel companies, which explains much, and Costco has the lowest prices because of its club status.
So now, coming into the year, we "lost" autos, home-related, commercial construction and retail. That's a huge chunk of what worked in 2013.
Based on these inputs, the big-portfolio managers rapidly switched directions and headed to tech, financial stocks and industrials.
That headlong shift met new facts on the ground these last two weeks, culminating into the big decline of the last few days.
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First, the industrials are heavily skewed toward worldwide growth. Worldwide growth includes China. Every single industrial company has reported decent order and revenue growth, including the much-maligned General Electric (GE), which has been the most visible disappointer. Yet, despite that, the now-well-publicized problems of the Chinese banking system -- they were problematic but not well-publicized until a particular bank's woes became obvious -- trumps the narrative of worldwide growth. A European comeback is minimized by the Chinese financial system.
Lost in the shuffle here is that American industrial strength -- as represented broadly by the surge in the transport stocks, based on real data about multiple-merchandise strength from the rails -- is still unequivocally on course. But my earlier discussion about autos, housing and the consumer points to those going off course shortly, or at least that's the perception.
Without China, the industrial thesis that had suddenly come to the fore seems naked and weak, especially after the run the group has had.
The financials? They were real good going into the quarter, and their reports have been real good as well: They're coming out with low loan losses, waning federal investigations -- although those never really go away -- and a return to net interest margin growth. But the sudden worries about China have caused a flight to quality that has driven U.S. interest rates down to levels that could return the banks to net-interest-margin weakness. So, the group now gets called into question.
Tech's the lone standout, and European tech is gaining strength, as we heard from Avnet (AVT). This company has 100,000 clients and many in Europe, so it knows best. That news, again, is being ignored because of the amorphous beast that is China.
Now, on top of all of these woes come the twin blindsides of Argentina and Turkey, and a new leg of decline in the emerging markets that many had thought had stabilized after the summer rate surge.
Now, at this point, emotions have run rampant that these aren't just canaries in the coal mine but that the coal miners are dropping like flies. There's absolutely no recognition whatsoever that these two proximate national causes of the emerging-market declines are just total ne'er-do-wells
Turkey's gone from being a secular growth state to one in transition to a backward state that embraces religion over growth, a fact that few want to admit or talk about. Argentina's going the way of Venezuela because of a very bad government. The fact that their currencies had held up at all going into these longer-term transitions simply shows the blind faith people have in growth in any darned nation that is perceived to be backward that can go forward. It's total joke thinking, but it has a lot of sway among the non-stick-following cognoscenti that we always have to put up with.
So now we have a world where most managers are out of position. It's a moment when consumer spending might be stalled, with the Fed unable to help, and with fledgling theses getting rocked as rates come down quickly.
The fact that these inputs are producing market-wide panic simply has to do with the S&P 500's initial grip on all stocks. We are in the throes of that moment. Making things worse is that we haven't seen a pullback for ages. This has produced too much euphoria, and too many new investors who have never been bloodied. People don't know where to turn. They are just fleeing en masse.
Now, as I have written endlessly for more than 30 years, there is a real pattern to all of these selloffs.
You get the initial shockwave. Everything gets crushed. Then you take a look at what the bonds are saying and doing and you take your cue from them. Right now the bonds are saying we should go back to the bond-market-equivalent stocks that had gotten so out of favor. They are saying that you need to select special situations, either where companies are self-helping with breakups, huge buybacks and mergers or where activists are playing a role. The bonds are saying we could be in for a recession, and that we should therefore invest accordingly.
I don't think we are going into a recession, I think that's way too extreme. Bond flight to quality can be a powerful and often misleading course after a few weeks of upside pressure, and then you revert to more normal investing based on earnings and expectations.
Still, the bottom line for the moment is that the panic is not going to produce long-term positive results. You simply have to wait until big-money repositions and then take advantage of the wreckage of that repositioning, betting that the international woes are fleeting and that the U.S. strength is simply in pause mode. You'd be betting that the pent-up demand from the Great Recession can still drive things, and that some of the consumer weakness is, indeed, one-off and not all cyclical or secular.
That's where I come out right now. You need to examine the share pullbacks of companies that have reported excellent numbers, and start investing in the expected whoosh down. You have to have conviction that the market is in reset mode and nothing else. You have to accept that the stocks that were working, coming in, are now going to give back this year's performance if they haven't done so already, and that they will now roll back the fourth-quarter's gains.
Most important, you have to accept that stocks are simply rotating in a business-as-usual fashion, something we haven't seen in such a long period of time that it seems downright alien. It is quite unfortunate that anyone who is calm in the face of the selloff gets blasted for being too complacent or even a Pollyanna. But if you do not have an issue in close reading, you can see that I am not saying, "Damn the torpedoes, full speed ahead." I am saying, "Damn some of those torpedoes, they are hitting home -- but others are duds that allow us to advance, yet with different stocks than we would have expected just a few short weeks ago."
At the time of publication, Cramer was long GM and M.