- Europe worries,
- the press' love of bad news, and
- how to avoid "no man's land."
Euro-Worries Are Getting Out of Hand
Posted at 11:41 a.m. EDT, May 17, 2010 Just imagine, for a moment, what would happen if mortgage rates from Fannie Mae ( FNM) dropped to 4.5%. What would happen if gasoline fell to $2.50 or even lower? What would happen if commodity prices came down and down hard? Would you like the situation? Wouldn't you like the idea that the Fed would be on hold at these low rates? Wouldn't you like the increased purchasing power you would get, especially at a time when the housing tax credit has concluded? Wouldn't you be looking for stocks to buy that were related to the consumer as they came down because of exogenous circumstances like foreign banks? > > Bull or Bear? Vote in Our Poll This market is giving you a resounding answer: Nope. That would be foolish.. None of that matters. Don't you dare think of buying a Best Buy ( BBY), even as it can buy its products more cheaply with a strong dollar and sell them to you for less. If you are thinking about buying Apple ( AAPL), you are nuts, because of what's going on in Europe. Attempt to buy a U.S. bank? Are you kidding? Do you know how much PNC ( PNC - Get Report) has on the hook in Spain? In Portugal? It might as well be called Portuguese National Bank, right? Isn't BB&T ( BBT - Get Report) Banco Bibao Trust? Silly you. Don't you see the relation between the euro and the price of food at Whole Foods ( WFMI)? Are you an idiot? Can't you see how Ross Stores ( ROST - Get Report) is going to get its butt kicked? That Deckers ( DECK) has to slow because of Greece? The idea that you think that a company like Standard Pacific ( SPF) trades with mortgage rates here and not mortgage rates in Lisbon is just fanciful. You are a moron. Of course, Hewlett-Packard ( HPQ - Get Report) has some exposure. Europe has been weak forever, and you have to ignore what they say about it getting stronger, because, after all, aren't they bozos who shouldn't get the benefit of the doubt? Wasn't John Chambers of Cisco ( CSCO) just fibbing when he said things were strong in Europe? Is there a vast national conspiracy among U.S. companies to lie about "the crisis" and how it will crush Whirlpool ( WHR - Get Report) sales, even as it doesn't have much overseas except Brazil? Oh, and it doesn't even matter in the end, because we can only imagine how hard Urban Outfitters ( URBN - Get Report) will be hit by China. We can just speculate on the vast damage to earnings that Teva Pharmaceutical ( TEVA) will suffer. Are you quaking about Cummins ( CMI) like I am, knowing that there are simply regulations that drive orders to new engines they make, but that's totally overridden by the desire of the Chinese to cool commercial real estate? Are you simply a moron? You have to be more worried. Maybe you are just brain-dead.
Editors Must Love the Dismal Stuff
Posted at 2:23 p.m. EDT, May 18, 2010 Just too hard ... again. It truly is hard because of the governments around the world. We hear that the Germans are about to ban naked short-selling, and instead of saying, "Good, good, they can't drive it down anymore," we say, "Wait a second, holy cow, how bad are things really? Isn't this panic on the part of the Germans?" You can bet which view takes precedence. Or the housing issue today. Housing starts going up -- good. Housing permits going down -- bad. So guess which one gets picked up and run with? Guess what people care about. Guess what they seize on. Tom Graff has some great stuff in Columnist Conversation about what matters in housing, but no one is listening. And when we hear about the redoing of mortgages, all we hear about are the ones that fail, never the ones that are holding, which are many. Negative builders with credibility like Bob Toll are saying that things are better. He used to say things are worse. He's ignored. People keep asking if there is financing on housing, maybe there isn't. But it is bountiful. No one listens. Home Depot ( HD - Get Report) reports a terrific number, much better than Lowe's ( LOW - Get Report). But what takes precedence? Take a guess. It is incredible, the prism is three-quarters empty even if the glass is half-full. Pessimism is building. Skepticism is building. But we are so not there yet. Random musings: I agree with
Avoid 'No Man's Land' at All Costs
Posted at 12:57 p.m. EDT, May 20, 2010 We have a huge "no man's land" problem, even if we are down 10% from the S&P's high, which often tempts me to be a somewhat sizable buyer of stocks I like, the so-called shopping list. But here's the problem -- the individual stocks that I like aren't there yet, "there" meaning where there's not all that much risk to bidding for them. We could be talking about Hewlett-Packard ( HPQ - Get Report) or Deere, which just reported great earnings and are trading off badly. But I would like to use some better bellwethers, some companies that reported the single best numbers in the Dow Jones averages. They stand out as being the best of the best when it comes to the quarter's just announced. The three? 3M ( MMM - Get Report), United Technologies ( UTX - Get Report) and Boeing ( BA - Get Report). It wasn't just that they all reported fantastic quarters that exceeded estimates handily. More important, all three were unexpectedly upbeat about their futures, with some vision of the problems that are now dominating our stock market. Emphasis on "some." All three of them made it clear that their businesses were on the upswing. All three of them said the upswings were diversified -- not all Europe, not all U.S., not all Asia, not all Latin America. But where do you buy them? Here's the checklist I use to decide whether to start bidding. It is the prism I like to use to see if it is time to buy. First you check yield: UTX at 2.5%, BA at 2.63%, MMM at 2.59%. None of them qualify as accidental high-yielders. Now, price-to-earnings multiple: MMM's at 14 times next year's earnings, vs. the estimates out there. So is United Technologies. Boeing's at 16 times earnings. Now we match their growth rates: MMM's growing at 12%, UTX at 11%, and Boeing's at 13% growth. UTX is less than 1 times earnings, which is attractive, but MMM's at a slight premium to growth and Boeing's at a real premium, although I can explain that away by saying that Boeing's at the beginning of a multiyear cycle, the Dreamliner build, which could last as long as seven years, as long as the others. Now we ask whether those earnings growth rates could be low or high. Given the collapse in commodities, we know the raw costs for all three companies could be low. They were all worried about raw costs on their conference calls. But the strong dollar could hurt all three, as there are competitive risks -- other companies that will have products that are cheaper if they sell them in euros. Their products now have a competitive advantage. Plus we know that countries' growths are slowing: Europe because of the need for austerity from the profligate ones, something the IMF will mandate; China by design of the government. That means, to me, that none of the stocks seems very cheap on earnings, if the end markets are getting weaker. Plus, I don't want to have a high price-to-earnings multiple in this level of uncertainty, as that presents some genuine risk. So on earnings I can't get excited. Still no man's land. Now let's talk about some real risks. The crash two weeks ago showed that there was some mechanical/systemic risk to the market. We don't know if the machines will fail us and back away. We don't know what will happen with the double and triple ETFs. We don't know how margined people are, how margined the hedge funds are. We saw a monster amount of liquidation in 2008 that took stocks down to absurd levels. Maybe we'll get those levels again, particularly if we get something like a Lehman event in Europe, either a country or a bank's failure. The uncertainty is killing stocks. We don't know about the plan in Europe, we don't know about financial regulation reform. So we have systemic risk from Europe and we have government risk from the United States and we have mechanical risk that we saw could be quite frightening, so frightening that we saw a outflows in mutual funds for the first time in 60 weeks, according to the keeper of that data (the Investment Company Institute).