Jim Cramer: What does the story tell us about bond rate scares like that

Where are we in this bond sale? Do we have a third? Two-thirds? Or are we where we need to be to start shopping?

As I said, I’ve studied all the rate scares we’ve had in the last few decades and this one pretty much follows the way those Fed feels pressure to raise rates on a very low base.

All these scares have in common the following:

1. Inflation by some measures seems out of control. In this case, it is wood, which has doubled in a year; copper, which is really Chinese demand, above $ 4; and oil, which is north of $ 60. They are visible and say the Fed needs to act.
2. A considerable number of stocks have been created that work best at stable rates like the ones we have, and these stocks have become toxic because they are considered dangerous places as they have no real profits or sales. These types of stocks need low inflation to make a long-term profit and they don’t get it.
3. The Treasury is assaulted for spending too much. Here we have the huge package of stimuli that occurs at a time when the pandemic seems to be following its course due to science. But spending is often the center of these scares.
4. We have deficits for higher rates that the Fed does not control.

Now, before I get to each of them, I want to remind you that all of this is happening in a bond market vacuum. If you read Warren Buffett’s letter this weekend, you’ll see unbridled capitalism and how little these four points mean. They’re noises to him, I don’t even think he hears it, though his discordant $ 11 billion cancellation of Precision Castparts reminds me that no one is immune to the “moment”. Buffett paid $ 32 billion for this excellent aircraft parts company six years ago. It was a high price at the time, too high as Buffett admits.

Still, what can be taken away from Buffett’s letter, as always, is that if you have a long-term vision things will work out in balance and this time he didn’t punish anyone for trying to do it at home. Thanks.

Now let’s get to the topic at hand. There are many investors, especially new investors, who do not have the interrelationship between bonds and stocks. Too easy, there are three intersections. First, rising rates increase stock competition and some would say that the fixed income flow of bonds is already threatened by the fixed income flow of bonds due to the “big” movement of rates. I think this is duck. The bonds are still very unattractive. Please read Buffett again if you do not agree. Second, interest rates, per se, are a sign of the future and the future is that we will have inflation and inflation is bad for stocks. Explaining why it’s bad is a bit like explaining why a football team is bad. He loses a lot. A lot is lost in stocks when inflation is bad. The third is the most difficult: increasing yield trigger algorithms that reduce individual growth stocks while stabilizing cyclical stocks. The latter cannot increase due to the downward trend in S&P futures of large macro funds that want less exposure. But the cyclical ones are in favor and, due to the years of latency, there are very few of them and they are not equivalent to even a tenth of the growth stocks. They can’t drive.

So where are we? I don’t want to rule out the more bullish cases – the last ten minutes on Friday were horrible, and yet the rates didn’t go up, so it’s possible we’re further than we think.

But I think it’s too optimistic. We have not yet overcome the stimulus. The Fed has not been pressured by what happens when that money is distributed and we are completely vaccinated. Only the variants, the malicious ones, can derail the vaccination plan and I think they will not be so serious just because our scientists are now one step ahead of the possibility.

What happens then?

I think when we have these scares no one has enough money on the sidelines to take advantage of them and your co-shareholders are your enemy. They don’t want to be tight, at the Buffett, maybe because they have options or because they are on the sidelines or because they think the market is chosen or they don’t understand the interaction of the bond market.

What they don’t understand is that while rates are low, even in a tiny move from 13% forty years ago or 7-8% from so many years in the 1990s, it means that, in percentage terms, the big ones money is scared.

Also, we’re still not at the point when Jay Powell is asked a question about what happens when everyone gets vaccinated and says “you know what, we did rates at zero a year ago, it’s time to let them go “.

Until you hear that you need to keep some powder dry. Note that I didn’t say “if you’re sorry”. At some point, it would be pointless to keep rates low if the economy grows and ten million people are rehired.

So the long answer is that this scare won’t end until Powell breaks with his current vision.

This means we could have some real pain ahead of some actions.

What kind of actions?

Five different types.

First, there are the companies that worked well last year and may not have done so well this year. He’s watching it right now, in real time, playing with Costco (COST) and Walmart (WMT). I know some face the higher labor costs these companies bear. Others are concerned that non-essential retailers are now coming back to make these companies worse.

I say that’s why you’ve already suffered such a rapid decline. Walmart is just 13 points from where the pandemic began. Do you think it is worth less than that moment, even since much of its competition has been destroyed? Of course not. Same with Costco. They are two amazing companies with stocks that will increase over time because they make a lot of money. This is not even unfathomable right now for some of the incomplete headlines. So you can bet that, like a Clorox (CLX), these companies will see their shares flirting with charts that would indicate that no value has been created. We buy them for Action Alerts PLUS because it is simply false that they are worth less than when the pandemic started.

So I’m saying that some stocks are already close to where they’re going to go and they just need a faster leg that can go too fast to buy them.

Then there is a second cohort, the Salesforce (CRM) / Workday (WDAY) group. They’re companies that are really starting to have amazing sales at a time when it’s pretty unimaginable for this to happen. These are companies with deferred income, so most could not see the trigger of the two companies with respect to recent quarters. Are sales absurd? Not at all. Not when rates are reduced. The big concern here, if you use the 2015-2016 paradigm, will be when one of these cohorts misses and blames the economy in the same way that LinkedIn did at the time. I don’t see that happening, so 30-40% falls won’t happen, IMO. Which means, again, that this group is a buy when we have the quick leg I hope for, when Powell is too pressured and says the magic words. Shares will be down, but we are not there yet.

Third group: companies that are supposed to benefit from higher rates. I don’t want you to think for a second that they really will. The only stocks that increase in a scare like this are stocks of pure commodities like copper companies and increase until China, the main customer, stops buying or we open more mines, which is happening now. The stocks that people SAY are going to go up will be cyclicals and banks, but that’s a duck. When rates rise and the Fed doesn’t follow through, banks will earn a little more from your deposits, but inflation will hide that until gains are reported. Cyclic concentration will not last because too many people will worry about lost numbers because rates are rising. Anyway, these companies are damaged leaders. There are too few.

Fourth, higher yields. These should go down to levels where yields are even higher before they are less risky to own. You can watch Pepsi (PEP) or Coca-Cola (KO) or Pfizer (PFE) or Merck (MRK) and see what happens. American Electric Power (AEP) is also a good intermediary. You can’t see it, but you know it’s happening. I like this group right here because now it’s starting to compensate too much. This is because there is a reshuffle towards stocks that work best when the economy opens up (just a handful), and those stocks are the fuel for that move. Although it is lower, the keyword is much lower.

Below is the final group, newly minted companies and companies based on the hope of electricity or alternative energy or SPACs that companies have found, but SPACs are overrated in relation to companies – Churchill Capital IV (CCIV) – Lucid Motors front and center. I have no idea how far they can go down. There are too many. They are not followed. They’re really part of the Wall Street advertising machine. Some may hold out because they have a good concept – check out Fisker (FSR). But it is case by case and a lot of money still has to be lost.

I know I’m not plotting a scenario that makes things worth buying. But I think the group that comes first will be the Salesforce sector with strong growth and profits. Because? Since every scare ends these stocks on the rise, that’s why you need to pay attention to them and start buying them, as they tend to anticipate everything I’ve just written.

Remember, I’m not trying to give you hope, just history. But the story is almost never wrong. I don’t think it will go wrong this time either.

(Costco, Walmart and Salesforce.com are shares in the Jim Cramer Action Alerts PLUS member club. Do you want to receive an alert before Jim Cramer buys or sells these shares? Learn more now.)