Jim Cramer: What history tells us about such an effect on the interest rate

Where are we in these bond-related sales? Are we one third door? Two thirds? Or are we where we need to be to start buying?

Like I said, I have studied all the interest rate scarcity we have had over the past few decades, and it follows much like those where the Fed feels pressure to raise rates on a very low basis.

These scare traits all have the following in common:

1. Inflation by some measures seems out of control. In this case it is wood, which has doubled within a year; buyer, which is really a Chinese demand, above $ 4; and oil, which is north of $ 60. They are visible and say the Fed should act.
2. There are a considerable number of stocks created that perform best with stable rates like us, and these stocks have become toxic because they are considered dangerous places as they have no real earnings or sales. These types of stocks need low inflation for a long-term down payment and they do not get it.
3. The treasury is being assaulted because it has spent too much. Here we have the enormous stimulus package at a time when the pandemic seems to be going its way because of science. But spending is often at the heart of this scare.
4. We get shortfalls from the higher rates that the Fed does not control.

Before I get to each one, I want to remind you that it all takes place in a vacuum on the bond market. If you read Warren Buffett this weekend, you can see unbridled capitalism and how little these four points mean. It’s a noise for him, and I do not even think he hears it, although his frightening $ 11 billion write-off of Precision Castparts is a reminder that no one is immune to ‘the moment’. Buffett paid $ 32 billion six years ago for this excellent aircraft parts business. It was a high price at the time, too high as Buffett admits.

The takeaway from Buffett’s letter, as always, is that if you look at the long term, things will balance out and that this time he will not discipline anyone for trying to do it at home. Thank you.

Let us now discuss the matter. There are many investors, especially new investors, who do not get the interrelationship between bonds and stocks. Too easily there are three intersections. First, higher rates make competition for equities, and some would say that the average stock’s dividend flow is already threatened by the fixed income stream due to the ‘big’ price movement. I think it’s canard. Effects are still very unattractive. Read Buffett again if you do not agree. Secondly, interest rates are in themselves a sign of the future and the future is that we are going to have inflation and that inflation is bad for equities. Explaining why it’s bad is just like explaining why a soccer team is bad. It loses a lot. You lose a lot in stocks when inflation is bad. The third is the most difficult: the yield of yield algorithms increases which shuts down individual growth stocks while stabilizing cyclical stocks. The latter cannot rise higher due to the downward pull of S&P futures from large macro funds that want less exposure. But the cyclics are favorable, and because of years of rest, there are very few of them, and that is not even a tenth of the growth stock. They can not lead.

So, where are we? I do not want to dismiss the strongest cases: the last ten minutes of Friday were terrible, and yet the rates did not rise higher, so it is possible that we are further than we think.

But I think it’s too optimistic. We have not yet passed the stimulus. The Fed has not been put under pressure about what happens if the money is distributed and we are fully vaccinated. Only the variants, the malicious variants, can derail the vaccination plan and I think it will not be just as serious because our scientists are now one step ahead of the post.

What happens then?

I think if we have this scare on our body, no one has enough money on the sidelines to take advantage of it and that your fellow shareholders are your enemy. They do not want to sit tight, a la Buffett, perhaps because they have options, or because they are on a margin or because they think the market is hampered or they do not understand the interaction between the bond market.

What they do not understand is that although rates are low, even a minuscule move compared to the 13% of forty years ago or the 7-8% of so long in the 90s, it means that big money on a percentage fright.

On top of that, we are not at the moment when Jay Powell is asked a question about what happens when everyone is vaccinated and he says “you know what, we took the rates to zero a year ago, it’s time to raise them to let go. “

Until you hear that your powder needs to be kept dry. Note that I did not say “if you hear it.” At some point, it would be useless to keep the rates if the economy grows and ten million people are re-employed.

The long answer, then, is that this fear will not end until Powell breaks with his current view.

This means that we may be in real pain for some stocks.

What kind of shares?

Five different types.

First, there are the companies that did well last year, which may not be doing so well this year. You see it now, in real time, with Costco (COST) and Walmart (WMT). I know that some are gripped by the higher labor costs that these businesses incur. Others are concerned that now non-essential retailers are getting worse with these businesses again.

I say that’s why you’ve been deteriorating so fast. Walmart is just 13 points higher than where the pandemic began. Do you think it’s worth less than that moment, because so much of the competition has now been destroyed? Of course not. Same with Costco. These are two amazing companies with stocks that are going to be higher over time because they make so much money. It is not even feasible for some of the sketchy containers at the moment. So you can bet that these companies, like a Clorox (CLX), will see their shares flank with charts indicating that no value has been created. We buy it for Action Alerts PLUS because it’s simply untrue that it’s worth less than when the pandemic started.

So I say that some stocks have already gotten closer to where they are going and just need one more quick paw that can happen too fast to buy.

Then there is a second group, the Salesforce (CRM) / Workday (WDAY) group. These are companies that started selling wonderfully at a time when it is unimaginable. These are deferred income businesses, so most have not been able to see the outbreak of both companies over the past few quarters. Is the sale absurd? Not at all. Not when the rates are higher. The biggest concern here, if you use the 2015-2016 paradigm, will be when one of this group misses the economy and blames as LinkedIn did at the time. I do not see this happening, so the 30-40% declines will not occur, IMO. Which again means this group is a bargain if we have the quick leg down I expect, when Powell is pushed too hard and says the magic words. The shares will fall ahead, but we are not there yet.

Third group: enterprises proposed to benefit from higher rates. I do not want you to think for a second that they will do the same. The only stocks that are so scared are pure commodity stocks like copper companies, and it is rising until China, the main customer, no longer buys, or that we get more mines to open, which is happening now. The stocks that people say will rise are the cyclical and the banks, but it is a canard. If rates go up and the Fed does not follow, banks make a little extra on your deposits, but inflation will obscure it until earnings are reported. The cyclical rally will not last because too many people will worry about the missed numbers because the rates are going higher. These companies are ugly leaders anyway. There are too few of them.

Fourth, higher returns. It should decrease at levels where returns are even higher before it is less risky to own. You can watch Pepsi (PEP) or Coke (KO) or Pfizer (PFE) or Merck (MRK) and you can see what happens. American Electric Power (AEP) is also a great pain proxy. You can not see it, but you know it’s happening. I like this group here because it’s starting to compensate too much now. This is because there is a reform to equities that perform better when the economy opens up – only a handful – and these equities are the fuel for the move. Lower silent, however, is the password, but not much lower.

Then there is the final group, the newly created companies and the companies based on the hope of EV or alternative energy or SPACs that companies have found, but the SPACs are overvalued compared to the companies – Churchill Capital IV (CCIV) – Lucid Motors is for and means. I have no idea how low this could be. There are too many of them. They are not followed. They’re really part of the Wall Street hype machine. Some may hold out because they have a good concept: look at Fisker (FSR). But it is case by case and here a lot of money is still lost.

I know I’m not finding a scenario that is worth buying. But I do think that the group that is at the bottom for the first time will be the sector with high growth with earnings. Why? Because every scare ends up increasing these stocks, you have to pay attention to it and start buying it, now actually because they tend to expect everything I just wrote.

Remember, I’m not trying to give you hope, but only history. But history is almost never wrong. I think it will not be wrong this time either.

(Costco, Walmart and Salesforce.com own Jim Cramer’s Action Alerts PLUS member club. Would you like to be warned before Jim Cramer buys or sells these shares? Learn more.)