Market of rags and riches

By Dr. Duru written for One-Twenty

April 18, 2008


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Forget the creeping inflation. Forget the soaring oil and gasoline prices. Forget the riots of the hungry poor. Ignore the on-going credit crunch. And definitely ignore the looming recession. There are riches in this market, and Google put on a "reverse" black swan leap for joy after hours with an incredible 17% pop. This move was the bizarro opposite of last quarters black swan dive downward. I won't repeat the earnings news since I am sure you already know it by the time you read this. But I will point you to Jeff Macke from Fast Money for you to understand just why Google was so hot last night ("Google is Dead"). I think Macke's skepticism could be found in abundance amongst the "smart money." But GOOG did a masterful job at working this conference call. The execs obviously did their homework. They knew what bad words to avoid and what to say to soothe the restless masses. With no bad words to hang onto, the buying spigots were open full blast. All those folks that sold into these earnings suddenly had to rush back in. I find these dynamics particularly interesting because all the data I saw reinforced my own skepticism. In the face of a sharply declining price I saw lots of complacency: short positions still lower than last year, put/call ratios languishing near year-lows, lots of institutional buying, analysts remaining exceptionally bullish... When the "complacent consensus" gets it right, it REALLY works! (I owned a simple put spread. See disclaimer here.)

To get and stay bullish on GOOG, I think we want to see it open without fading the after and pre-market moves and then at least hold onto that open. I suspect sellers will show up next week and then we want to see buyers step right back in. This is a tall order to ask with so much overhead resistance, but I suspect the panic amongst those who feel like they "missed out" should be a powerful force. (For reference on just how big this move is, see previous analysis of one-day GOOG stock moves).

While everyone gets googalicious again, it is worth noting how many stocks and sectors are working, and working well, even as all sorts of dire talk continues about the U.S. economy. We have a true divergence of rags and riches. As the American consumer retrenches and curses the local gas station everyday, anyone dependent on sales to that consumer are reporting recession/slowdown type of earnings. Retailers like Linen 'N Things are now going bankrupt and homebuilders are begging for tax relief from Congress. Companies that are focused overseas are soaring like American bald eagles: heavy machinery, infrastructure, agriculture (cannot export enough to both feed the world's hungry and our greedy SUVs - aka ethanol), heck, even solar companies! And then you also have the steel and coal companies benefiting from the weak dollar, international build-outs, and coal shortages. Even the railroads and truckers are on cruise control. Finally, certain technology stocks are riding the hopeful promises of the overseas savior: RIMM and IBM went positive for the year well before the NASDAQ's current bounce from the bottom. It almost sounds like this theory of the decoupling global economy is truly happening. That is, while the U.S. in general languishes, the rest of the world is proceeding like all is well. I have long been a skeptic of this decoupling theory because the overall stock indices of various countries still seem to be well correlated with the U.S. with China being one of the worst performers year-to-date. No wonder the bears and bulls can still argue. The bears are staring at the rags and the bulls are lusting after the riches - and both can be correct...for now.

The dichotomoy of rags and riches has become ever more stark on the international scene as well. At the same time many developing economies are rushing to build infrastructure and the like and experiencing mini-booms, the world's poor and hungry seem to be getting poorer and hungrier. Reading "Across Globe, Empty Bellies Bring Rising Anger" in the New York Times not only reminds me how fortunate we are in America, but it also reminds me how important it is to manage a stable, non-inflationary economy. Who is going to "bail out" these starving people? In this country, the middle class and the poor are largely placated by the promise and potential of moving up the economic ladder and by the comfort that in the worst of times the government can and will provide social supports. For those of you who remain interested in eroding those supports, allowing the free market to wreak periodic havoc on the vulnerable, and using taxpayer money to aid corporate crises but not consumer crises, I remind you that every citizenry has its limits! For example, it is no wonder that "three Democrats" are running for President right now - this quip came from a presumably right wing conservative I ran into in an elevator while vacationing recently in South Carolina. (I will be revisiting this theme in the coming months).

Anyway, there is enough renewed buying in last year's best momentum stocks that it makes you feel like the market REALLY wants to put in THE bottom here. Even financial institutions are getting big boosts to their stock prices after announcing big DILUTIONS of existing shareholders. Lehman (LEH) got the party started at the beginning of this month by a major multi-billion dollar dilution that was awarded a 18% pop. Granted that was a monster up day in the market and LEH has since not progressed much past the highs of that day, but you have to admire a sector where plenty of cash continues to pour in (this is exactly what the Fed wants to see!). Execs are now saying they will seek capital infusions and are not getting punished for changing their tune 180 degrees (witness Merrill Lynch). I would hazard to say that enough anxious cash is sitting on the sidelines to finally get this market over some serious overhead resistance soon. But if my overall bearish feelings prove correct, this will mark a false breakout. Maybe just in time for the "sell in May..." syndrome. Should be interesting to watch it play out, and I say you should enjoy the ride as much as you care to. After all, the Fed has forced down interest rates to the point that cash seems like trash, and you can't beat inflation leaving it in your savings account (baby boomers getting ready to draw down from the stock market cannot be happy about their aternatives).

Having said all that, some parts of this story just are not quite clicking with me. For example, at the same time the stocks of many truckers are hitting 52-week and all-time highs, their fuel costs are soaring. If we believe the government's inflation statistics, then we know that these increases in costs are not being passed on to the consumer in any significant way. Truckers are even registering louder and louder complaints to anyone who will listen. And then I see this nugget from CSX's earnings call on Wednesday (from briefing.com): "Higher pricing more than offset weakness in volumes. Co says most of its markets had strong revenue growth. Co expects pricing momentum to continue. Higher exports are helping drive traffic, although imports have slowed. Co says it was able to achieve continued pricing gains due to overall cost and service advantages that rail provides versus other modes of transportation." So, how in the world is CSX able to command higher prices with weakening volumes? Why are their customers willing to pay up? Is CSX relying on a smaller and smaller base of the few industries that are doing well? And most confusing is the implication that CSX has been taking transportation share from trucking. So tell me why are trucking stocks doing so well with competitive AND fuel price pressures? Something is not adding up, and when things do not quite add up, a "blow-up" must be on the horizon. Stay tuned.

Until then, be careful out there...!

DR. DURU®, 2008