Thursday, October 30, 2008
(Cont'd from above)...

It turns out the earnings are still hit-and-totally-miss... as we saw in that great quarter from Colgate-Palmolive (CL), that caused the stock to surge... and that colossal abomination of a quarter from AVP, that took the stock down. One... (all aboard! sound)... the other... (trainwreck sound)...

Both stocks fit the template that we talk about here all the time, but only one worked.

Now, I wish I had never taken Avon Products Inc. (AVP)'s CEO, Andrea Jung, off the Wall of Shame... which reminds me... we have some solid openings developing there...

On the quarter... Avon called. No one answered... globally.

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So, how on earth did we get into a situation where there is such an enormous disconnect between the fundamentals of individual stocks and the performance of the S&P 500 futures... like today? That's what happened today. This total love of the market as a whole, even though everyone knows that stocks that make up the market mostly stink...

You know what?... Sometimes you need visuals (as he takes out a rope to illustrate his "tug of war" analogy)...

We see a tug of war between stocks as an asset class and an individual stock... where the market wants to go higher because it's so beaten down... and individual stocks that need to go lower, because the fundamentals are bad and the future is so murky...

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Here's how the tug of war plays out...

You've got huge pension funds that are pouring money into the futures... We even saw a guy very close to a major state pension fund who said he understands that these pension funds are being told by state legislatures that they have to buy as much stock as they can through the S&P 500 futures, because it's the quickest way to get long, even though the actual fundamentals are awful...

They have no desire to own individual names... these pension funds... it's totally nuts. But it's how the market works... Money is flowing into futures, into stocks as an asset class... and the fund managers, rather than making it a fight over the fundamentals, they're just joining in too... they're buying the futures too... and riding the market up to gain performance.

Nobody's pulling money out of the market for the simple reason that the futures are rising, and the (money) managers believe it will keep going higher as the Fed - now on our side after yesterday's statement - goes into overdrive, potentially bailing out anything and everyone, including hedge funds.

We like the market because they like the market... even as we don't like the companies underneath the market.

What you need to understand is that stocks, as an asset class, are commodities themselves and, right now, that commodity is cheap... the S&P 500 is cheap, compared to other asset classes, like cash. Stocks are more attractive right now, even though, based on earnings, you'd be hard pressed to find a handful of individual stocks that aren't overvalued.

These big pension funds... well, they play a relative game... When an asset class goes down precipitously, as stocks have done, that makes bonds relatively more expensive, and stocks cheap... So it has funneled billions from an expensive basket of bonds to the cheap basket of stocks. They have no time. They have to do it in a matter of days. Sometimes they have to do it in a matter of a day... even hours... hours to transfer. If you have to get the job done, you will take the futures to where the Dow rallies 900 points, and not give a darn that you might move the market yourself.

That's what happened Tuesday. My sources have confirmed it. It was a state pension fund that went nuts, and put a huge amount of money to work in one day, and didn't stop until the bell.

The tug of war between the fundamentals and the cheapness of stocks as an asset class defines this market. On a down day, the individual stocks win... the homework wins... the fundamentals win... But, on an up day, the homework means nothing. You have to suspend your disbelief in the actual stocks, and understand that the futures have won... Stocks as a commodity have won, not individual stocks, and you ride them higher, if you want to try to make any money.

Now... you could see this tug of war... the actual tug of war... play out this week in United States Steel Corp. (X).

Remember last week, I told you that, over the summer and fall, X went down almost as much as U.S. Steel, circa 1929 to 1932... so the stock had gotten cheap... But analysts were downgrading it before it reported this week, because of expected earnings shortfalls... We got a very downbeat forecast, which should have meant that, for X, the negatives won, and I'd be dragged along, okay... But then the stock jumped 8 points, because it's part of the S&P 500 and, therefore, was headed up huge, so the futures buyers pulled letter X up, as part of a cheap asset class, even though it should be dismissed from the class.

The analysts were totally right about the company. When they cut the numbers, you know... it should have gone down. But I think they misjudged that the asset class' reverse gravity effect would pull letter X up, even as it should have gone down...

Here's the bottom line...

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The bottom line!:     Looking ahead, we're going to keep seeing this battle...  this tug of war between the fundamentals and the futures.  Whatever side I'm on will always win the tug of war, because it's my show...  Between stocks as an asset class and individual stocks, that will be the tug of war for the rest of the year.  Now, the individual stocks have troubled earnings... the market, we don't care.  Now I don't know which side will ultimately prevail, but now you know how the market can work, even when individual stocks pretty much stink.  A rising futures tide will lift all boats... even the Titantics... in this bizarre market... incomprehensible to all but a total mad man with really good sources, and a flair for the inconceivable and conspiratorial...   In other words, you've come to the right darn place.

[verbatim recap]

Read Jim's next Segment here