Jim Cramer: What history tells us about bond rate expectations

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

As I said, we have studied all the tariff hopes we have had in the last decades, and this follows quite a bit in the form of those in which the Fed feels pressure to raise rates from a very low base.

These scares all have in common the following:

1. Inflation by some measures seems out of control. In this case, it is timber, which has doubled in a year; copper, which is really Chinese demand, rising over $ 4; and oil, which is north of $ 60. They are visible and say the Fed needs to act.
2. A considerable number of stocks have been created that do best with stable rates like us and these stocks have become toxic because they are seen as dangerous places because they have no real gains or sales. These types of stocks need low inflation for a long-term payment and do not get it.
3. The treasury is under attack for spending too much. Here we have the huge stimulus package coming at a time when the pandemic seems to be taking its course because of science. But spending is often at the heart of these scares.
4. We get shortcomings from higher rates that the Fed does not control.

Now, before I get to each one, I want to remind you that all of this is happening in a 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. I’m noisy for him and I don’t even think he hears it, although his $ 11 billion writings on Precision Castparts remind us that no one is immune at the “moment.” Buffett paid $ 32 billion for this great aircraft company six years ago. It was too high a price at the time, as Buffett admits.

However, the solution to Buffett’s letter, as always, is that if you look at the long term, things will work out balanced, and this time he didn’t punish anyone for trying to do it at home. Thanks.

Now, let’s deal with the issue at hand. There are many investors, especially new investors, who do not get the relationship between bonds and shares. Too light, there are three intersections. First, rising interest rates compete with equities, and some would say that the average dividend flow of equities is already threatened by the fixed income stream of bonds due to the “large” movement of rates. I think this is a duck. Bonds are still very unattractive. Read Buffett again if you do not agree. Secondly, interest rates, in themselves, are a signal of the future, and the future is that we will have inflation, and inflation is bad for stocks. Explaining why it’s bad is a bit like explaining why a football team is bad. He loses a lot. You lose a lot in stocks when inflation is bad. The third is the most difficult: it rises in yield-triggering algorithms that decrease individual growth stocks, while stabilizing cyclical stocks. The latter cannot increase due to the downward pull of S&P futures from large macro funds that want lower exposure. But cyclicals are in favor and, due to the rest years, are very few and are not equal to even a tenth of the growing stocks. I can’t drive.

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

But I think he’s too optimistic. I haven’t passed the stimulus yet. The Fed has not been pressured by what happens when the money is distributed and we are completely vaccinated. Only the variants, the malicious variants, can derail the vaccination plan and I think they will not be as serious just because the scientists are one step ahead of the possession now.

What happens then?

I think when we have these scares, no one has enough money on the side to take advantage of them and your co-shareholders are your enemy. They don’t want to sit tight at Buffett, maybe because they are in options or because they are on the sidelines or because they think the market is arranged or they don’t understand the interaction of the bond market.

What I don’t understand is that while rates are low, even a tiny move from 13% forty years ago or 7-8% of that much in the 1990s means that, as a percentage, big money he’s scarrying.

Plus, we’re not yet in the moment when Jay Powell is asked what happens when everyone gets vaccinated and says, “You know what, we took zero rates a year ago, it’s time to let them to go higher ”.

Until you hear that you need to keep some powder dry. Notice that 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 hired back.

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

This means that we could have real pain in the face of actions.

What kind of stocks?

Five different ways.

First of all, there are companies that did well last year, which may not work as well this year. See this right now, in real time, play with Costco (COST) and Walmart (WMT). I know that some are overwhelmed by the higher labor costs that these companies incur. Others are worried that now that non-essential retailers have returned, these companies need to do worse.

I say that’s why you’ve already had such a rapid decline. Walmart is just 13 points up where the pandemic started. Do you think it’s worth less than that moment, even if much of its competition has now been destroyed? Of course not. Same with Costco. These are two amazing stock companies that will grow over time because they make so much money. This is not even understandable at this time for some of the incomplete owners. So you can bet that, like a Clorox (CLX), these companies will see their stocks flirting with charts that would indicate that no value has been created. We buy them for Action Alerts PLUS, because it is simply untrue that they are worth less than when the pandemic started.

So, I say that some stocks are already close to where they are going to go and they need another quick leg that might happen too soon to buy.

Then there is a second cohort, the Salesforce (CRM) / Workday (WDAY) group. These are companies that are starting to have amazing sales at a time when it is quite unimaginable for this to happen. These are deferred revenue companies, so most have not been able to see the breakdown of both companies compared to recent quarters. Are sales absurd? Not at all. Not when rates rise more. The big concern here, if you use the 2015-2016 paradigm, will be when one of these cohorts misses and blames the economy as LinkedIn did then. I don’t see it happening so the 30-40% declines won’t happen, IMO. Which means, again, that this group is a buy when we have the quick leg I’m waiting for, when Powell is pressed too hard and says the magic words. Shares will fall ahead, but we’re not there yet.

The third group: companies that are supposed to benefit from higher rates. I don’t want you to think for a second that they will. The only stocks that grow in a scare like this are pure commodity stocks, such as copper companies, and grow until China, the main customer, stops buying or we get more mines to open, which is happening now. The stocks that people say will grow will be cyclical and banks, but this is a duck. When rates rise and the Fed doesn’t track, banks make a little more of your deposits, but inflation will hide that until earnings are reported. The cyclical rally will not last, because too many people will worry about the missed number, as the rates increase. These companies are crazy leaders anyway. There are too few.

Fourth, higher yields. They need to fall to levels where yields are even higher before they are less risky to own. You can watch Pepsi (PEP) or Coca-Cola (KO) or Pfizer (PFE) or Merck (MRK) and see what happens. American Electric Power (AEP) is also a painfully good proxy. You can’t see it, but you know it’s happening. I like this group right here, because now it’s starting to overcompensate. That’s because there is a reshuffle to actions that do better when the economy opens up – just one hand – and those actions are the fuel for that move. However, below is the watchword, but not much smaller.

Then there is the final group, newly created companies and companies based on EV hope or alternative energy or SPACs that have found companies, but SPACs are overvalued relative to companies – Churchill Capital IV (CCIV) – Lucid Motors being front and center. I have no idea how small they can go. There are too many. They are not being followed. They are really part of the hype on Wall Street. Some may resist because they have a good concept: check Fisker (FSR). But it is a case in point and a lot of money is still to be lost here.

I know I’m not drawing a scenario that makes things worth buying. But I think the group that comes first will be the high-growth, high-income Salesforce sector. Why? Because every scare ends with these stocks growing, which is why you need to pay attention to them and start buying them, actually 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 don’t think it will be wrong this time either.

(Costco, Walmart and Salesforce.com are owned by Jim Cramer’s member club Action Alerts PLUS. Do you want to be alerted before Jim Cramer buys or sells these shares? Find out more now.)