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It isn't wholly incidental that we call news articles "stories." They arrange facts and inferences into tidy narratives, headlined with assertions. And so, the front page of this past Thursday's Wall Street Journal offered "Markets Fear End of Stimulus."
Maybe they do. But this was two days after the release of the minutes of the Federal Reserve March meeting, which withheld explicit promises of further money-printing and bond-buying by the central bank. Id-driven markets don't wait 24 hours to express such fears. Indeed, Wednesday's little 1% drop in stock indexes was accompanied by a Treasuries rally -- the latter not exactly a sign that investors fear the Fed won't be buying more Treasuries.
While the popular investor discourse might have been thrown slightly off course by the hint that the Fed was going to wait and see before furnishing additional largess, the stock market has mostly been elevating not on hopes of more free money from the Fed, but on the kind of economic confidence and gradually augmented risk appetites that themselves make extraordinary Fed assistance less likely.
As Dan Greenhaus, global strategist at institutional broker BTIG, wrote Thursday: "Less accommodation from the central bank is unquestionably a good thing for investors. Fundamentals should matter, not central-bank policy nuance."
All the bulls need is for the fundamentals -- with lots of positives already in sight and widely embraced -- to cooperate.
In looking at last week's minor selling squall, it more likely was about an overbought stock market moving past the quarter-opening flush of fresh money and being reminded, by Spain's difficult bond auction, that while lots of encouraging domestic economic news has been recognized in share prices, another potential eruption of credit stress has not.
The turbulence so far has been minor and manageable, doing little to dent the positive multimonth trend, especially in large-cap U.S. stocks. It will be months before the market closely fixates on the stimulus -- amounting to several percentage points of gross domestic product, from government spending and not the Fed -- that's set to expire amid a gridlocked Washington.
Birinyi Associates' Ticker Sense blog noted last week that the S&P 500 had risen 28% in six months, a feat achieved or exceeded 20 times since 1927. Following such advances, stocks generally chalked up further one-, three-, and six-month gains, but they weren't gaudy. Only a handful were of the double-digit variety that would have left sidelined investors kicking the dirt.
INTEGRATED-ENERGY BIGGIE ConocoPhillips (ticker: COP) is spinning off its refining-and-marketing arm -- the largest such business among the U.S. majors -- as Phillips 66 at the end of the month. And investors should note the opportunity that will probably arise from the split.
Conoco, the integrated major least favored by Wall Street, is following Marathon Oil (MRO) in separating its so-called downstream assets (pipelines, refining, retail gasoline operations) from its core production business. The latter is low-margin but predictable, and Phillips 66 benefits from impressive scale. Conoco holders will receive one share in the new company (to be traded under the symbol PSX) for every two Conoco shares.
While "when issued" trading in the new shares won't begin until April 12, analysts plugging in industry-average cash-flow valuations on each business figure that the combined value is around $92 or $95 per Conoco share, or more than 20% above Conoco's latest quote of 75.36.
Following the spinoff, ConocoPhillips shares are expected to carry a dividend yield around 4%; Phillips 66, closer to 2%. The latter company will have a seasoned executive team, a good balance sheet, and an ability to make acquisitions and potentially further exploit the value of its pipeline assets.
GAP (GPS) HAS BENEFITED handsomely this year from what one former U.S. president called the soft bigotry of low expectations. After an upbeat Barron's cover article ("Can the Gap Come Back?," Dec. 26, 2011) called the shares cheap and said any evidence of positive top-line progress would cause them to surge, the response was almost uniformly skeptical. Sell-side analysts then, as now, doubt Gap's proven expense discipline can be augmented by success on the selling floor.
Since then, Gap has logged three straight months of strong comparable-store sales, capped by an 8% rise in March. Granted, premature spring weather, easy comparisons with a weak 2011, and a trend favoring bright colors such as the Gap chains have been featuring helped. Yet a Jefferies & Co. analysis suggests that even teens are warming to Gap styles.
The market has rewarded the believers, sending Gap up more than 40% since our article ran; it's now at 26.45. At that price, the stock seems closer to fair value, but if comp-sales momentum persists, expect a still-doubtful Wall Street to start raising earnings forecasts and upgrading the shares to provide further support -- belatedly.
Comments? E-mail: michael.santoli@barrons.com
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