NEW YORK (Real Money) -- The oil and the dollar trades go so hand in hand, we can't tell which is which. But it might not matter because they are pretty much two sides of the exact same trade.
Let me explain.
I have been describing the sea change going on as a belief that the dollar has topped and oil has bottomed. I am trying, frantically, to figure out how against-the-grain the sea change really is right now. Think about it. When you see high-quality domestic stocks that were viewed as safe, lower-gasoline, strong-dollar plays, getting hit pretty much by the day, you have to wonder how far along the sea change already is.
Here are some examples of domestic companies that reported really fabulous quarters but are already well off their highs: Costco (COST), $145 down from $154; Urban Outfitters (URBN), $40 from $47; Jack in the Box (JACK), $87 from $99; DineEquity (DIN), $95 from $114 (IHOP and Applebee's); Kroger (KR), $70 from $77; Nordstrom (JWN), $76 from $83.
Or consider the health care companies that had been bid up furiously as a place to hide from the strong dollar, even as they had no oil exposure: Cardinal (CAH), $85 from $91; AmerisourceBergen (ABC), $114 from $120, or Actavis (ACT), $289 from $317; UnitedHealth (UNH), $113 from $123, Cigna (CI), $125 from $135 and HCA (HCA) $74 from $80.
All of these companies reported pretty much everything you could ever want, and they have all failed or been failing. To me the question is: Do they already reflect the new world of the dollar topping out and gasoline going no lower? Or is this the beginning of the BIG ROLLOVER of the consumer stocks and the domestic health care stocks as the darlings?
Then, if that's the case, what will work? The obvious winners are the big industrial companies. So let's pick several that reported "acceptable" numbers -- none could be awesome, because of the strong dollar -- and see how far they are from their highs: Eaton (ETN), $70, down from $79; Honeywell (HON), $102 down from $106; United Technologies (UTX), $114 down from $125; Cummins (CMI), $141 down from $161 but up from a recent important, downgrade; Caterpillar (CAT) $87 down from $111 (but up from $78); General Electric (GE) $27.31 down from $28; and Emerson (EMR), $59 down from $68.
I could argue that with the exception of General Electric, if you truly believed that the dollar has peaked, these have much more room to run than the domestic hiders. The outliers for industrials, by the way, would be:
- Snap On (SNA), a tool company with a growing European business that is performing extraordinarily well, that is therefore barely down, $151 from $154;
- Stanley Works (SWK), $99 down from $101 with good European numbers;
- Ingersoll Rand (IR), $66 down from $69 with improving ones.
Can they co-exist? For that we may need, consider the technology companies that have had terrific U.S. results but weaker overseas numbers. For these we can isolate Google (GOOGL), $538 down from $597, $78 down from $86 -- brought down by Yelp (YELP) and Twitter (TWTR) even as it is pulling away from them -- Oracle (ORCL), $44 down from $46, and IBM (IBM), $173 down from $196. If the dollar has really turned and the foreign economies are really getting better, then these have MUCH further to go as they all really did suffer, IBM in particular, from the compares. The toughest one is Cisco (CSCO), which at $29 is only down a $1 from its high, but that's most likely because it was one of the very few companies where a strong dollar didn't impact earnings given innate European strength.
If you think that the consumer is doing better overseas, then you can focus on three companies stocks that were hurt by the strong dollar. They are retail-related and had very strong U.S. sales. They are: Ralph Lauren (RL), $136 down from $187, PVH (PVH), $103 down from $133; or VF (VFC), which just reported, $72 down from $77. All of these would make more sense than the pure domestic plays if you think the dollar's done going higher. Add in TJX (TJX), $65 down from $71, which has more European exposure than the domestic retailers listed above and you might have something. I do believe, by the way, that the newfound weaker dollar is the reason why Nike (NKE), $100 down from $103, has far outperformed the far more domestic Under Armour (UA), $77 from $88.
You can use this prism across the board depending upon your outlook. For example, I would prefer owning Johnson & Johnson (JNJ) against any other major drug company, given its exposure to overseas and it's at $100 down from $110. You would want to be in Walgreen Boots Alliance (WBA) at $83 down from $93, rather than in the all-domestic CVS (CVS), $100 down from $105.
Or when it comes to consumer packaged goods you would want to switch out of Clorox (CLX), $106 down from $112 and go into the heavily hurt Procter & Gamble (PG), $80 down from $93. If you want to bet that the sea-change is happening lightning fast, you can scoop up a just-reported-and-dinged Colgate (CL), $67 down from $71. If you cared more about the dollar depreciating vs. a basket of currencies not weighted to the euro, that's Kimberly-Clark (KMB), $111 down from $119.
Obviously you want either Coca Cola (KO), $40 down from $45 or Pepsico (PEP), $95 down from $100. Coke is hedged against the euro and yen, though, even as it is being hurt by a basket of emerging market currencies; the latter may be just perfect.
It's the dollar trade, not the oil side of the trade, which, to me, is behind. Almost all of the oils I hit are back to levels assuming crude goes to $90. It can't get there. Till now, most of the appreciation in oil has come pretty much one-for-one with the weaker dollar and a modicum of demand --about one million barrels more a day -- from a stronger Europe. But to get to even $70 a barrel, you are going to have to have a stronger fall-off this quarter in U.S. production -- and at $70 there's plenty of oil that comes back to market.
To me, that means $65, the original price suggested by Honeywell's Dave Cote, who has a hefty chemical refinery business, might be just about right. At those prices you might want to buy two stocks uniquely situated for the environment, PPG (PPG), $224 down from $237, and Dow Chemical (DOW), $51 down from $54 with a much higher positive correlation to oil than PPG.
The logic seems pretty simple: what are the holes? First, with the exception of Cisco, Snap On, Stanley Works, Ingersoll Rand, Dow, Pepsico and Walgreen's, Nike and perhaps VF Corp, you may still suffer earnings disappointments and not get the benefit of the weaker dollar. Second, China can be a fly in the ointment for companies like Caterpillar or Cummins, as they are far more sensitive to Chinese orders than a weaker dollar.
That horrendous Chinese PMI number last night -- the lowest in a year -- tells me that you have to struggle mightily to thread the currency needle without being hit by China. I am deliberately NOT including Ford (F) and GM (GM) in the analysis because they are so hung on both actual unit sales in Latin America and Europe, where they are simply doing much poorly than, say Toyota (TM) or BMW and Volkswagen (VLKAY), that you just can't make a compelling case.
Lost in the shuffle of all of this strong-to-weak dollar are the banks. But perhaps most of all they can be winners, if only because there will be a perception that economic growth around the world will restrain the dollar from rising if the fed raises rates. You want JPMorgan Chase (JPM) and Wells Fargo (WFC) if you think rates are going higher, but they are a waste of firepower otherwise.
Now this is not an exhaustive list. However, it does show the ramifications of the contrary trade and how much discounting has already occurred because of the sea-change. I think that the idea of the Fed raising rates soon after a strong employment figure -- if we get one -- might be the entry point you need if you can be patient, as that should momentarily cause the dollar to rise.
So a big job creation number, paradoxically, could be your next best chance to rotate into the sea change. I would stay tuned to see.
Editor's Note: This article was originally published at 7:20 a.m. EDT on Real Money on May 4.