If you had to define the early cycle, if you had to outline what stocks should be soaring coming out of a recession into a boom and which ones should be faltering, you would have to say the action in this market in the last month is the quintessential behavioral pattern.
What are the components of the early cycle? First, it's the homebuilders. As is typical coming out of a recession, the stocks precede the bottom of housing. That's exactly what's happening with the lowest permits and highest affordability and best mortgage rates and massive inventory. Everywhere, except on Wall Street reporting, the bottom is bursting out. When you read the lead story in the Sunday Philadelphia Inquirer, and it is all about the thousands of prospective homebuyers heading south to pick up condos and homes for half of what they were worth two years ago -- or even less -- and you know that virtually no one has broken ground in the Sunshine State in a year, you can bet that the bottom's actually behind us. This housing market has wiped out all but the most stable private builders and even the public ones are merging as we know from Pulte (NYSE: PHM) (Cramer's Take) and Centex (NYSE: CTX) (Cramer's Take). So, in the next cycle, you can see some profitability developing year over year even though the new homes don't have much margin because the foreclosed homes next door are going for a song. And don't believe this won't change the dynamic of future foreclosures. In most areas, rent is higher than the interest on mortgages, so you will find that second or third job needed to stay in your home. The incentive structure's radically different than a year ago.
Banks rally and rally hard in this environment, and we know that's happening. The stress test should give the strong banks the chance to prey on the weak, as I think everyone has the wrong story about the stress test. The results of the stress tests will likely not be more money except for perhaps Citigroup (NYSE: C) (Cramer's Take), although I doubt even that. The results will be "merge or be seized," with the government absorbing the bad loans until they can be sold to the public-private partnerships, which will flourish. We'll get a lot of mergers, which will strengthen banks like FirstMerit (NASDAQ: FMER) (Cramer's Take) and JPMorgan Chase (NYSE: JPM) (Cramer's Take).
Autos would be rallying, but only Ford (NYSE: F) (Cramer's Take) can rally because it's the only solvent manufacturer, which is bullish as all get-out for that company. Taking the early-cycle place of the traditional autos are AutoNation (NYSE: AN) (Cramer's Take), CarMax (NYSE: KMX) (Cramer's Take) and AutoZone (NYSE: AZO) (Cramer's Take); Cooper Tire (NYSE: CTB) (Cramer's Take) and Johnson Controls (NYSE: JCI) (Cramer's Take); and Autoliv (NYSE: ALV) (Cramer's Take), which just doubled in five weeks. Even lowly worm Pep Boys (NYSE: PBY) (Cramer's Take) is on fire. Same with Sears (NASDAQ: SHLD) (Cramer's Take) off its automotive division, which never faltered during this period. I still like Monro Muffler (NASDAQ: MNRO) (Cramer's Take), the best of the lot. What could be happening? The end of the endless dealer networks, which forces people to have their cars fixed elsewhere.
Retail and restaurants should be on fire in an early-cycle period, and they sure are. Darden (NYSE: DRI) (Cramer's Take) hit a 52-week high Friday. Panera (NASDAQ: PNRA) (Cramer's Take) isn't far behind. Brinker (NYSE: EAT) (Cramer's Take) and Yum! Brands (NYSE: YUM) (Cramer's Take) act terrifically, and I would buy this group aggressively.
Remember when Macy's (NYSE: M) (Cramer's Take) was supposed to go out of business? How about Jones Apparel (NYSE: JNY) (Cramer's Take), which is buying back a ton of its debt? Gap's (NYSE: GPS) (Cramer's Take) been a fantastic stock. CVS (NYSE: CVS) (Cramer's Take) and Walgreen (NYSE: WAG) (Cramer's Take) are returning to their rightful places as growth retailers. JC Penney (NYSE: JCP) (Cramer's Take) and Nordstrom (NYSE: JWN) (Cramer's Take) have been so hot that the shorts are frantic. Kohl's (NYSE: KSS) (Cramer's Take) and Target (NYSE: TGT) (Cramer's Take) look to go much higher. TJX (NYSE: TJX) (Cramer's Take) and Ross Stores (NASDAQ: ROST) (Cramer's Take) are rallying hard.
Plus, the action is amazing in E*Trade (NASDAQ: ETFC) (Cramer's Take) and Schwab (NASDAQ: SCHW) (Cramer's Take) and to a lesser extent, Legg Mason (NYSE: LM), T. Rowe Price (NASDAQ: TROW) (Cramer's Take) and Janus (NYSE: JNS) (Cramer's Take). The first two are about "mad money," meaning self-directed people who feel that these are amazing prices that have to be taken advantage of, not in index-fund style, a method that's been heavily discredited when merged with buy and hold. The latter? I think they are simply recovering and money is slowing coming in, a change at the margin for certain.
These are all the signs of a coming boom, not the end of a depression going into a recession. Some of this positive action can be caused by the dramatic swing in energy prices year over year, which has enriched the 91.5% of people who have retained their jobs. And some of it is the extra money people are getting out of their paycheck because of the changes President Obama has put in. But much of it just seems to be the joy of the end of the selloff in stocks.
Meanwhile, is there anything worse than Abbott Labs (NYSE: ABT) (Cramer's Take)? Maybe some of the food companies, like Kellogg (NYSE: K) (Cramer's Take), Heinz (NYSE: HNZ) (Cramer's Take), General Mills (NYSE: GIS) (Cramer's Take) and Hershey (NYSE: HSY) (Cramer's Take)? Procter & Gamble (NYSE: PG) (Cramer's Take), Unilever (NYSE: UN) (Cramer's Take)? Maybe Celgene (NASDAQ: CELG) (Cramer's Take)?
So why then have I been nipping at CELG and GIS and ABT Pepsi (NYSE: PEP) (Cramer's Take)? Simple, because the missing piece of the puzzle is whether we are coming out of a depression -- garden-variety -- and going back into a recession or whether we are really going to have an amazing expansion, as the charts indicate.
I just don't believe we can be entering that expansion mode. I think what we are seeing is the end of the depression period that started when the feds failed to save Lehman. I think we are seeing the beginning of when companies can get credit without the backing of the feds, that JPMorgan deal last week being the big tell. I think that while there are still plenty of places where credit is hard to come by, particularly in the commercial real estate portion of the economy, I think even that's about to change for the positive (this is a lonely position).
The worry about credit cards is way overdone, too, as the default rate's really rather good and the stock of American Express (NYSE: AXP) (Cramer's Take) hints that the peak in defaults may be upon us. (Nobody long Capital One (NYSE: COF) (Cramer's Take) wants to hear about the president's plan to curb excessive interest rates on cards, as Larry Summers talked about on "Meet the Press," but I think that in the end, everyone knows that such an initiative has very little likelihood of passing because without the high fees, the card companies simply won't issue them to people who need credit who may not be sure things, to say the least ...)
No, we are not yet seeing signs of growth, just signs that the depression is ending. That's what the leveling off of the employment claims shows. That's what the better-than-expected earnings are about -- beating depression estimates. That's what some of the biggest moves in stocks, particularly retailers, is about -- bankruptcy off the table.
We have to be realistic. While I don't believe this rally is chimerical -- it shouldn't be called a rally, as it has been a full-fledged bull market off the bottom -- I am confident that the next leg up will not stay up without definitive signs that things are actually getting better, not just staying flat. Like they are now. And we can't get a boom until we see what this economy will be like without federal help and with higher tax rates, and that's something that might be around the corner. Hence, the desire, at least for me in Action Alerts PLUS, to take advantage of what might be once-in-a-lifetime cheapness of growth stocks like PEP, ABT, CELG and Gilead Sciences (NASDAQ: GILD) (Cramer's Take), while they are hated.
Still, the charts can't all be lying. This market's got the most fabulous set of leaders that I can recall since bottoms in 1991 and 2003 (although tech can't be considered early-cycle, it can be considered post-depression rallying).
Maybe that's why it has proved to be so hard to contain. That and the fact that the shorts, which pressed all of these stocks into oblivion obviously with the help of no borrowing, are scrambling so hard.
I find it hard to go against RealMoney contributor Doug Kass, who has called this market so well. So I won't, and I am not committing a dime more into this market until we get a 3% to 5% pullback.
Somehow, though, I wonder what would cause it, and I presume it would have to be a General Motors (NYSE: GM) (Cramer's Take) bankruptcy, a Citigroup stress failure or some sort of oil shock because an explosion of terror or even war in the Middle East that an increasing number of people are talking about. (I don't think it is going to happen, but then again, nothing can be ruled out over there as a test of the new Obama administration.) As onerous as the coming cap-and-trade regime could be, brought on by the Environmental Protection Agency coming to its senses and becoming an important agency again, I don't think that will do it either as Congress has always, in the end, bucked the Nancy Pelosis and sided with the utilities because no representative wants to be the reason why electric rates are going higher.
So, I go with Doug. But I worry. And it isn't about the downside I worry about. It is about not having enough money in to stay ahead of the averages, as I have been. That's a bizarre worry after six straight up weeks, isn't it?
But it is also a testament to the power of this early-cycle rally and the wonder of an expansion beckoning, and not just a correction out of doom into something much less than boom because of the events of Lehman finally being put behind us.
Jim Cramer is co-founder and chairman of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer was long Abbott, Celgene, Gilead, General Mills, JPMorgan, Pepsi, Unilever and Yum! Brands.
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Reader Comments (Page 1 of 1)
4-20-2009 @ 5:37PM
Iridium said...
If you have to take a second or third job just to stay in your home you really aren't living in a very good time.
You don't see a little problem with that statement of yours Jim.
We may have reached a plateau near the bottom but we haven't reached the bottom yet. We still have not seen the fallout from the actions of the government. If cap and trade passes forclosures wil reach 90% of property in some areas.
Property may be more affordable than it was but it still really isn't affordable to live in this day and age. Everything is more expensive on a relative scale. When inflation starts creeping in everyone will hurt other than the top 5% who stole billions during the past few years.