Business
My big concern with the Fed and why we are in a holding pattern
It is widely believed that Federal Reserve Chairman Jerome Powell doesn’t give a damn about corporate news. He is strictly a creature of broad government economic reports – the consumer price index, the producer price index, industrial production, retail sales and, of course, the nonfarm payrolls numbers. He also cares what his fellow Fed members say. But for the most part, an income explosion is a tree falling in the forest: He̵[ads1]7;s not around to hear it make a sound. If that’s the case, market players should sell anything that depends on the US economy stabilizing here and forget about any company that needs acceleration. These growth stocks are simply victims of the moment. If you want to own them, you have to be prepared to take losses before you see any gains. The few growth names we have in the Charitable Trust, including technology, are of particular concern. Even if things just stabilize, that will mean a loss of earnings and a cut in price targets from levels when the world was a better place. But what if Powell isn’t tone deaf. What if he noticed that Nucor ( NUE ), the top steelmaker in the world and the largest in the U.S., just issued the equivalent of a profit warning, and steel plates are going into a lot of construction. Or, holy cow, the big miss by FedEx (FDX) late Thursday was so weak that even as new CEO Raj Subramaniam tried to reset expectations, we want to do our part not to have a worldwide recession. Or perhaps Powell sees that housing starts and mortgage applications are unbelievably weak. Or more importantly, that top homebuilders — including Lennar ( LEN ) and KB Home ( KBH ), which report earnings Wednesday after the Fed meeting — say things are definitely slowing down. We know that retail, apart from Club holding Costco (COST), which also reports this week, has been miserable. We could go on and on with the chemicals and papers this week. I believe the man takes in everything, including all company reports of any size. The question is: Does he want all this pain to happen? Does he want layoffs, which create a larger pool of workers rather than a larger workforce? Does he want the so-called service economy to collapse with the commodity economy? And most importantly, can it unfold slowly or must it be done quickly? If it’s the former, many stocks have already taken quite a beating. If it’s the latter, that means more rate hikes quickly until that CPI is where he wants it and the “Help Wanted” signs come down. In that case, nobody has enough money and technology is still very dangerous. I won’t guess. I accept a 75 basis point increase in the Fed Funds rate. I’ll let Powell tell us if we’re going to be ready for another 75 in November, or if he’s willing to wait to see what kind of damage another increase will cause. Remember, that would be the third consecutive meeting of 75. The tightening cycle began with 25 in March and 50 in May, followed by the aforementioned 75s in June and July. (There was no meeting in August.) A 75-basis-point hike at next week’s September meeting would be the sensible move, and Powell has prided himself on caution since the fall of 2018, when he was rash in calling for locked-in moves. If he is open to seeing how another 75 plays out and people buy shares, he may find himself on the defensive. Remember, he needs people’s assets to come down – home and portfolio values - so those who think they can retire or engage in not working need to get back to work. That’s why I think my biggest fear is getting 75 and we’re not done, because that means you can’t own technology, even way down at today’s level, and industries can only be owned if they have secure 4% dividend yields. Up until Friday, the rise in the 2-year Treasury note told you we were going to get a “we’re not done” from the Fed. If that bond continues to climb toward 4% or breaks it, we won’t even need Powell to tell us we’re not done raising rates yet. That’s why I’m a little solemn as I head out to San Francisco this week for Dreamforce, the club that hosts Salesforce’s ( CRM ) annual event. Many of the companies I will see are international. Their numbers will be crushed by the strong US dollar, Covid lockdowns in China and what happens with Russia’s war on Ukraine. FedEx told you that the US has started to slow down. It will only continue. I want to see people face to face before we sell technology because I don’t want to be in a position where we have to buy it back higher. But I won’t hesitate to sacrifice once-sacred positions if it looks like Powell and the dollar and Covid and Russian President Vladimir Putin are all going to cause the number of cuts; the analyst community still largely has price targets that are too high. Unless they come down, and they only seem to come down after the companies tell them to, then we’re going to have a very different earnings season. Companies that were able to raise prices and names on the health care system will work. Banks can do well because the default values are not going higher. But anything technical or related to big expenses will be hammered. If we are oversold, there will be no rush to sell technology and industry until we get a bounce. But buying them at these levels just doesn’t seem like a good idea. Seller? Better. (See here for a complete list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive an exchange alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a share in his charitable fund’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE INVESTMENT CLUB INFORMATION ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH OUR DISCLAIMER. NO OBLIGATION OR OBLIGATION EXISTS OR IS CREATED BY YOUR ACKNOWLEDGMENT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR REWARDS ARE GUARANTEED.
Federal Reserve Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee on January 29, 2020 in Washington, DC.
Samuel Corum | Getty
It is widely believed that Federal Reserve Chairman Jerome Powell doesn’t give a damn about corporate news. He is strictly a creature of broad government economic reports – the consumer price index, the producer price index, industrial production, retail sales and, of course, the nonfarm payrolls numbers. He also cares what his fellow Fed members say. But for the most part, an income explosion is a tree falling in the forest: He’s not around to hear it make a sound.
