Where are we in the bond-related sell-off? Are we a third? Two thirds? Or where do we need to start buying?
As I have already said, I have studied all the interest rate panics of the past two decades, and this is almost in the form of the Fed feeling pressure to raise interest rates from a very low basis.
These fears all have the following in common:
- Inflation of certain measures seems uncontrollable. In this case, wood is wood that has doubled in a year. Copper, which is actually China’s demand, has risen by more than US$4; and oil, the price is more than US$60. They are visible, they say the Fed must act.
- A large number of stocks have been created, and these stocks perform best at a stable exchange rate like ours. These stocks become toxic because they are considered dangerous places because they have no actual revenue or sales volume. These stocks need low inflation to reap long-term returns, but they have not achieved this.
- The Ministry of Finance was attacked for overspending. In this case, due to scientific reasons, the pandemic seems to be gradually developing, so we have a huge stimulus plan. However, spending is usually at the core of these fears.
- We get shortfalls from higher interest rates beyond the control of the Fed.
Now, before I start discussing each issue, I want to remind you that all of this happens in a bond market vacuum. If you read Warren Buffett’s letter this weekend, you will see unfettered capitalism and what these four points mean. They are loud noises to him, and even though the Precision Castparts that he wrote down by $1
Nonetheless, Buffett’s letter remains the same, that is, if you look at things for a long time, everything will be balanced, and this time, he did not blame him for anyone trying to be at home. thank you.
Now, let us deal with the current problem. Many investors, especially new investors, do not get the correlation between bonds and stocks. It’s too simple, there are three intersections here. First of all, rising interest rates have intensified competition for stocks. Some would say that due to “substantial” changes in interest rates, the dividend flow of common stocks has been threatened by fixed income flows of bonds. I think this is mustard sauce. Bonds are still unattractive. If you disagree, please read Buffett again. Secondly, the interest rate itself is a signal of the future. The future is that we are about to inflate. 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. When inflation is unfavorable, you will lose a lot of stocks. The third is the most difficult: increasing the speed of the earnings trigger algorithm can both reduce individual growth stocks and stabilize cyclical stocks. The reason why the latter cannot go higher is because large macro funds that want to reduce risk exposure have pulled down S&P futures. But cyclical factors are beneficial. Due to the multi-year dormant period, there are few cyclical factors, and they are not even equal to one-tenth of the growth stocks there. They cannot lead.
So, where are we? I don’t want to ignore the most optimistic scenario: the last ten minutes of Friday are terrible, but the rate has not increased, so we may go further than we thought.
But I think this is too optimistic. We have not yet passed stimulus measures. When the money was allocated and we were fully vaccinated, the Fed was not under pressure. Only these variants (malicious variants) can derail the vaccination plan. I don’t think they will be that serious. This is only because our scientists are now one step ahead.
What will happen then?
I think that when we encounter these panics, no one will get enough money off the sidelines to take advantage of them, and your common shareholders are your enemies. They don’t want to sit down, Buffett, maybe because they have options, or because they have a margin, or because they think the market is improperly manipulated or they don’t understand the interaction of the bond market.
What they don’t understand is that even if the interest rate is insignificant, even if it is insignificant compared to 13% 40 years ago or 7-8% for such a long time in the 1990s, it also means that in terms of percentage, large sums of money will be scared.
In addition, we haven’t asked Jay Powell what happens when everyone is vaccinated. He said, “Did you know that a year ago we lowered the interest rate to zero, and now it’s time to let They raised interest rates.”
Until you hear that you must keep some dry powder. Please note that I did not say “if you heard it”. At some point, if the economy grows and 10 million people are re-employed, keeping interest rates low will be meaningless.
Therefore, the long-term answer is that this panic will not end until Powell breaks the current view.
This means that certain stocks may face real pain.
What kind of stock?
First, some companies performed well last year and may not perform well this year. You can now compete against Costco (COST) and Walmart (WMT) in real time. I know that some people are troubled by the higher labor costs these companies bear. Others worry that now that non-essential retailers are back, these companies must perform worse.
I said, this is why you have fallen so quickly. Wal-Mart is only 13 o’clock before the pandemic begins. Even though most of its competition has been destroyed, do you think it is less valuable than that moment? of course not. Same as Costco. These are two amazing companies whose stocks will rise over time because they make a lot of money. For some rough holders, this is even unthinkable. Therefore, you can bet that, like Clorox (CLX), the stocks of these companies will show an amplitude adjustment on the chart, indicating that no value is created. The reason we bought them is Action Alerts PLUS because their value is lower than the value at the beginning of the pandemic, which is incorrect.
Therefore, what I want to say is that some stocks are already close to the level they want to go, and only need to make another quick leg, which may be bought too fast.
Then there is the second group, the Salesforce (CRM)/WDAY group. These companies are beginning to truly achieve amazing sales, which is hard to imagine. These are deferred revenue businesses, so most people do not see the breakthroughs made by the two companies in the past few quarters. Is the sell-off absurd? not at all. When interest rates are rising, this is not the case. If you use the 2015-2016 paradigm, the biggest worry here will be when one of this group misses and blames the economy in the way LinkedIn did at the time. I think this will not happen, so there will be no 30% to 40% drop. Again, this means that when Powell is under excessive pressure and said magical words, when we expect me to act quickly, this group of people is a buy. The stock will bottom out before then, but we are not there yet.
The third category: companies that should benefit from higher interest rates. I don’t want you to even think about what they will actually do. The only stocks that rose in this panic were pure commodity stocks like Copper Corporation, which kept rising until the main customer, China, stopped buying or we had more mines open (which is happening now). The stocks that people say will rise will be cyclical stocks and bank stocks, but this is news. When interest rates rise and the Fed does not follow up, the bank will put a little bit more in your deposits, but inflation will mask this situation until it reports earnings. The cyclical rebound will not last, because too many people will worry about rising interest rates and miss the numbers. In any case, these companies are terrible leaders. They are too few.
Fourth, the high-yield. These must be reduced to a higher rate of return in order to reduce the risk of ownership. You can watch Pepsi (PEP) or Coke (KO) or Pfizer (PFE) or Merck (MRK) and see what happened. American Electric Power Company (AEP) is also a good pain reliever. You can’t see it, but you know it is happening. I like this group here because it is overcompensating now. This is because people are beginning to reorganize the stocks that performed better when the economy opened up-only a few stocks-these stocks are the driving force for this action. The lower is the slogan, but it is not low.
Then there is the last group, newly established companies, and companies based on the hope of electric vehicles or alternative energy or SPAC. These companies have found companies, but SPAC is overvalued relative to companies-Churchill Capital IV (CCIV )-Lucid Motors front and middle. I don’t know how low these can go. There are too many of them. They are not paid attention. They are indeed part of the Wall Street hype machine. Some people can insist because they have a good concept: see Fisker (FSR). But this is case by case, and there is still a lot of money to lose here.
I know that I haven’t figured out a plan to make things worth buying. But I do think that the high-growth revenue division of Salesforce ranks first. why? Because every panic ends with the rise of these stocks, this is why you have to pay attention to them and start buying them, actually now because they tend to anticipate everything I just wrote.
Remember, I am not giving you hope, just history. But history is almost never wrong. I don’t think it will be wrong this time.
(Costco, Walmart, and Salesforce.com are all held in Jim Cramer’s Action Alerts PLUS membership club. Do you want to be alerted before Jim Cramer buys and sells these stocks? Learn more now.)
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