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

Where are we in this bond-related sale? Are we over a third already? Two thirds? Or are we where we need to be to start shopping?

As I said, I have studied all the rate scares we have had in the past two decades and this is practically following the shape of those in which the Fed feels pressure to raise rates from a very low base.

All of these scares have the following in common:

1. Inflation by some measures seems out of control. In this case, it is the wood, which has doubled in a year; copper, which is actually Chinese demand, above $ 4; and oil, which costs $ 60. They are visible and are saying that the Fed must act.
2. There are a considerable number of actions created that present better results with stable rates like ours and these actions have become toxic because they are being seen as dangerous places, as they have no real profits or sales. These types of stocks need low inflation for a long-term return and they are failing to do so.
3. The Treasury is being attacked for spending too much. Here we have the huge stimulus package coming at a time when the pandemic appears to be underway because of science. But spending is often at the center of these scares.
4. We have shortcomings with the higher rates that the Fed does not control.

Now, before I approach each one, I want to remind you that all of this is happening in a vacuum in the bond market. If you read Warren Buffett’s letter this weekend, you can see capitalism rampant and how little these four points mean. They are a noise to him, and I don’t even think he hears, although his shocking $ 11 billion depreciation from Precision Castparts is a reminder 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, the conclusion of Buffett’s letter, as always, is that if you have a long-term view, things will balance out, and this time, he didn’t punish anyone for trying to do this at home. Thanks.

Now let’s deal with the matter at hand. There are many investors, especially new investors, who do not understand the interrelationship between bonds and stocks. To make it easier, there are three intersections. First, the ever-higher rates favor competition with equities and some would say that the average flow of dividends from equities is already threatened by the flow of fixed income from securities because of the “big” movement in rates. I think this is canard. The titles are still unattractive. Read Buffett again if you disagree. Second, interest rates alone are a sign of the future and the future is that we will have inflation and inflation is bad for stocks. Explaining why this is bad is like explaining why a football team is bad. You lose a lot. You lose a lot in stocks when inflation is bad. The third is the most difficult: it increases yield trigger algorithms that reduce individual growth actions while stabilizing cyclical actions. The latter cannot rise due to the downward pull of S&P futures from large macro funds that want less exposure. But cyclicals are in favor and, because of the dormant years, they are very few and do not even reach one tenth of the growth stocks out there. They cannot lead.

So, where are we? I do not want to dismiss the most optimistic of cases: the last ten minutes of Friday were horrible and, even so, the rates have not gone up, so it is possible that we are going further than we think.

But I find that very optimistic. We haven’t passed the stimulus yet. The Fed was not pressured by what will happen when the money is distributed and we are fully vaccinated. Only the variants, the malicious variants, can make the vaccination plan unfeasible and I think they will not be so serious just because our scientists are one step ahead of the pack now.

So, what happens?

I think that when we have these scares, nobody has enough money to take advantage of them and their co-shareholders are their enemies. They do not want to sit still, à la Buffett, perhaps because they are in options or because they are on the margin, or because they think the market is rigged or because they do not understand the bond market interaction.

What they don’t understand is that, while rates are low, even a tiny move compared to the 13% of forty years ago or the 7-8% of so long ago in the 90s, means that, on a percentage basis, big money is scared.

Furthermore, we have not yet reached the point when Jay Powell will be asked what happens when everyone gets vaccinated and he says “you know what, we reduced rates to zero a year ago, it’s time to let them go up”.

Until you hear that you have to keep some dry powder. Note that I didn’t say “if you hear that”. At some point, it would not make sense to keep rates low if the economy was growing and ten million people were rehired.

So the long answer is that this scare will not end until Powell breaks with his current view.

This means that we may have some real problems ahead for some actions.

What kind of actions?

Five different types.

Firstly, there are companies that performed well last year and may not perform as well this year. You are seeing this now, in real time, playing with Costco (COST) and Walmart (WMT). I know that some are concerned about the higher labor costs that these companies are assuming. Others are concerned that non-essential retailers are now back – these companies must be getting worse.

I say that’s why you’ve had such a rapid decline. Walmart is just 13 points above where the pandemic started. Do you think it is worth less than that moment, even though much of your competition has been destroyed? Of course. Even with Costco. These are two incredible companies with stocks that will rise over time because they make a lot of money. This is not even understandable now for some of the incomplete supports. So you can bet that, like a Clorox (CLX), these companies will see their actions flirt with graphics that would indicate that there was no value creation. We are buying them for MORE action alerts because it is simply untrue that they are worth less than when the pandemic started.

Therefore, I am saying that some stocks have already approached where they are going and just need another quick drop that can happen too fast to buy.

Then there is a second cohort, the Salesforce (CRM) / Workday (WDAY) group. These are companies that are starting to really have incredible sales at a time when it is quite unimaginable that this will happen. These are deferred revenue businesses, so most were unable to see the disruption that both companies had in relation to the past quarters. Are sales absurd? No way. Not when rates are exploding higher. The big concern here, if you use the 2015-2016 paradigm, will be when someone in that cohort will lose and blame the economy like LinkedIn did at that time. I don’t see that happening, so the 30-40% drops are not going to happen, IMO. Which means, again, that this group is a buy when we have the quick leg I’m waiting for, when Powell is pushed too hard and says the magic words. Shares will reach the bottom before that, 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 are. The only stocks that go up in a scare like this are pure commodity stocks like copper companies and go up until China, the main customer, stops buying or we have more mines to open, which is happening now. The stocks that people say will rise will be cyclical and banks, but that is a canard. When rates rise and the Fed does not follow banks, do a little more on your deposits, but inflation obscures this until profits are reported. The cyclical rise will not last because many people will worry about missing numbers because rates are rising. In any case, these companies are terrible leaders. There are very few of them.

Fourth, higher yields. These have to go down to levels where yields are even higher before they are less risky to acquire. You can watch Pepsi (PEP) or Coca (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 is happening. I like this group here because it is now starting to pay off. This is because there is a reorganization towards the stocks that perform better when the economy opens up – only a handful – and these stocks are the fuel for this movement. Even lower, however, is the watchword, but not much lower.

Then there is the final group, the newly minted companies and the companies based on the hope of EV or alternative energy or SPACs that have found companies, but the SPACs are overvalued in relation to the companies – Churchill Capital IV (CCIV) – Lucid Motors being ahead and center. I have no idea how low they can go. There are many of them. They are not followed. They are really part of the Wall Street propaganda machine. Some may resist because they have a good concept: take a look at Fisker (FSR). But it’s on a case-by-case basis and a lot of money is yet to be lost here.

I know I’m not drawing up a scenario that makes things worth buying. But I think the group that will get to the bottom first will be the high-growth sector with profits from Salesforce. Why? Because every scare ends up with these stocks going up, that’s 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 trying to give you hope, just history. But the story is almost never wrong. I don’t think it will go wrong this time.

(Costco, Walmart and Salesforce.com are members of Jim Cramer’s Action Alerts PLUS member club. Want to be notified before Jim Cramer buys or sell these shares? Learn more now.)