Jim Cramer: What History Tells Us About Bond Rate Fears Like This

Where are we in this bond sale? Are we a third party? Two-thirds? Or are we where we need to be to start buying?

As I said, I’ve studied all the rate fears we’ve had over the past two decades and this one pretty much follows the shape of those where the Fed feels pressure to raise rates on a very low base.

These fears all have in common:

1. Inflation by certain measures seems out of control. In this case, it is wood, which has doubled in one year; copper, which is really Chinese demand, above $ 4; and oil, north of $ 60. They are visible and say the Fed must act.
2. There are a considerable number of stocks that have been created that work best with stable rates as we have done and these stocks have become toxic because they are considered dangerous places because they have no actual income or sales. These types of stocks need low inflation for long term returns and they don’t get it.
3. The Treasury is under attack for having spent too much. Here we have the huge stimulus package coming at a time when the pandemic seems to be taking its course thanks to science. But spending is often at the heart of these fears.
4. We get loopholes from higher rates that the Fed does not control.

Now, before I get to each one, I want to remind you that this is all happening in the vacuum of the bond market. If you read Warren Buffett’s letter this weekend, you can see unbridled capitalism and how little these four points mean. They make noise for him, and I don’t even think he hears them, even though his $ 11 billion depreciation of Precision Castparts is a reminder that no one is immune from the ‘moment’. Buffett paid $ 32 billion for this excellent aircraft parts company six years ago. It was a high price then, too high as Buffett admits.

Still, the takeaway from Buffett’s letter, as always, is that if you take a long-term view things will work out and this time he hasn’t berated anyone for trying to do so. the House. Thank you.

Let us now turn to the question under consideration. Many investors, especially new investors, do not understand the interrelationship between bonds and stocks. To make it easier, there are three intersections. First, rising rates lead to competition for stocks and some would argue that already the average dividend stream of the stock is threatened by the fixed income bond stream due to the “big” movement in rates. I think it’s duck. Bonds are still very unattractive. Read Buffett again if you don’t agree. Second, interest rates in and of themselves are a signal of the future and the future is that we are going to have inflation and inflation is bad for stocks. Explaining why it’s bad is a bit like explaining why a football team is bad. It loses a lot. You lose a lot of stocks when inflation is bad. The third is the most difficult: yield trigger algorithms that lower individual growth stocks while stabilizing cyclical stocks. The latter cannot go higher due to the downward pull of S&P futures contracts from large macro funds that want less exposure. But the cyclicals are in favor and, because of the years of dormancy, there are very few of them and they are not even a tenth of the growth stocks there. They can’t lead.

So where are we? I don’t want to rule out the more optimistic cases: Friday’s last ten minutes have been horrible and yet rates haven’t gone up, so there’s a chance we are further ahead than we think.

But I think it’s too optimistic. We haven’t passed the stimulus yet. The Fed has not been pressured for what happens when this money is distributed and we are fully immunized. Only the variants, the malicious variants, can derail the vaccination plan and I think they won’t be that bad just because our scientists are now one step ahead of the group.

So what happens then?

I think when we have these scares nobody has enough money on the sidelines to take advantage of them and your co-shareholders are your enemy. They don’t want to stay tight, a la Buffett, maybe because they are in the options or because they are on the margin or because they think the market is rigged or they do not understand it. bond market interaction.

What they don’t understand is that even though rates are low, even a tiny move from the 13% of 40 years ago or the 7-8% so long in the 90s, this means that, as a percentage, big money is afraid.

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

Until you hear that you need to keep some powder dry. Notice I didn’t say “if you hear that”. 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 fear won’t stop until Powell breaks with his current point of view.

This means that we could have real difficulties for some actions.

What kind of actions?

Five different types.

First, there are the companies that did well last year that might not do as well this year. You see that right now, in real time, playing with Costco (COST) and Walmart (WMT). I know some are concerned about the higher labor costs these companies incur. Others fear that now non-essential retailers are back, these companies must do worse.

I’m saying that’s why you’ve already experienced such a rapid decline. Walmart is only 13 points ahead of where the pandemic started. Do you think it’s worth less than this time even though much of its competition has now been destroyed? Of course not. Same thing with Costco. These are two amazing companies whose shares will increase over time because they are making a lot of money. It is not even an option at the moment for some of the summary holders. So you can bet that, like a Clorox (CLX), these companies will see their stocks flirt with charts that would indicate that there has been no value creation. We buy them for Action Alerts PLUS because it is simply wrong to say that they are worth less than at the start of the pandemic.

So I’m saying some stocks have already approached where they’re going to go and just need a faster leg down that might come too fast to buy.

Then there is a second cohort, the Salesforce (CRM) / Workday (WDAY) group. These are companies that are really starting to make incredible sales at a time when it is quite unimaginable that it is happening. They are deferred income companies, so most could not see the breakout of the two companies from the last quarters. Are the sales absurd? Not at all. Not when rates go up. The big concern here, if you use the 2015-2016 paradigm, will be when a member of that cohort misses and blames the economy like LinkedIn did back then. I don’t see that happening, so the 30-40% declines won’t happen, IMO. Which means, again, this band is a buy when we have the quick leg that I expect, when Powell takes too much pressure and says the magic words. Stocks will be at their lowest before that, but we’re not there yet.

Third group: companies supposed to benefit from higher tariffs. I don’t want you to even think for a second that they actually will. The only stocks that climb in such a scare are pure commodity stocks like copper companies and they go up until China, the main customer, stops buying or we open more mines, that is. that is happening now. The stocks that people think will rise will be cyclicals and banks, but that’s a duck. When rates go up and the Fed doesn’t follow the banks, the banks earn a little more on your deposits, but inflation will obscure it until profits are declared. The cyclical rally will not last as too many people will worry about missed numbers as rates go up. These companies are lousy leaders anyway. There are too few of them.

Fourth, higher returns. These must drop to levels where returns are even higher before they are less risky to own. You can watch Pepsi (PEP) or Coke (KO) or Pfizer (PFE) or Merck (MRK) and you can see what’s going on. American Electric Power (AEP) is also a good indicator of pain. You can’t see it, but you know it’s happening. I like this group here because they are now starting to overcompensate. That’s because there’s a shuffle towards stocks that do better when the economy opens up – only a handful – and those stocks are the fuel for that movement. Lower still, however, is the watchword, but not much lower.

Then there is the final group, the newly formed companies and companies based on the hope of EVs or alternative energy or PSPCs that have found companies but PSPCs are overvalued compared to companies – Churchill Capital IV (CCIV ) – Lucid Motors being in front and center. I don’t know how far they can go. There’s too much. They are not tracked. They really are part of the Wall Street hype machine. Some may hold out because they have a good concept: check out Fisker (FSR). But it’s case by case and a lot of money remains to be lost here.

I know I am not drawing a scenario that is worth buying things. But I think the group that will dominate first will be the high growth, profit-making Salesforce industry. Why? Because every fear ends with an increase in these stocks, which is why you need to pay attention to them and start buying them, in fact now, because they tend to anticipate everything I just wrote.

Remember, I’m not trying to give you hope, just history. But history is almost never wrong. I think it won’t be bad this time either.

(Costco, Walmart, and Salesforce.com are holdings in the Jim Cramer Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these shares? Find out more now.)