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Once Again, the Turnaround Is Real
Posted at 2:18 p.m. EDT on Friday, Aug. 9
Europe and China: Where are they? Are they done going down? Can they be counted on for tailwinds in the third and fourth quarters? Or will they remain headwinds? Isn't that how you feel on days like today? The market got hammered and then buyers came in, in part because of a sense of worldwide optimism.
One thing's for certain: The European markets have been runaways since the S&P 500's bottom: Markets in Spain, Greece, Italy, France, the Netherlands, Ireland, Portugal and Switzerland are all up double digits since the beginning of the summer. That's pretty amazing. I simply do not believe you can get this kind of recovery in these stock markets without something positive and lasting going on.
Now, we have ample evidence that Europe's been bottoming. We have no evidence of Europe actually improving in a sustainable fashion. We mostly have a cessation of job loss.
However, was it any different when the U.S. market bottomed? Our stock market took off while the skeptics whined on and on that it wasn't for real, that it was all made with job cuts and flat revenue, particularly for the international companies. That said, you could argue that the European snap-back will be bigger than ours for the bottom line, because our companies made huge jobs cuts worldwide -- so any cessation of revenue loss is a big deal.
Four groups could benefit dramatically: the international banks, the techs, industrials and the autos. Secondarily, the beverages, discretionary healthcare plays and even the packaged-goods outfits would see some year-over-year benefit.
I think the turn is real. When we hear from companies next time around, the tone will be much different. How amazing would that be for U.S. companies like Ford , General Motors , Citigroup , PPG , Eaton , Avnet , Hewlett-Packard and General Electric of the country? You might even be tempted to buy McDonald's and Coca-Cola off that trade.
China's harder. For more than a year we have seen numbers out of this country that have been worse than expected. Just as with earnings estimates, it took a year before the estimates and expectations were so low that they could be beaten. I think that's all that is happening in China. I would feel a lot different if I saw the Baltic Freight Index resume its climb from the spring. That's just not happening. I expect that China will remain a headwind to earnings expectations in the third quarter. But if Europe picks up this quarter, then I think China could switch to a more neutral position.
Of course, you have the alienating backdrop of Russia, India and Brazil, which are not doing well at all. Call them the Sick BRICs. But a turn of the 600 million in Europe would more than make up for those.
No matter what, there's still pervasive bearishness among portfolio managers about both. But here's an interesting perspective that I share with Stephanie Link, co-portfolio manager of the Action Alerts PLUS charitable trust. We have been waiting patiently to buy some more Vanguard MSCI Europe ETF for the portfolio, and the darned thing never comes in. Meanwhile, as much as I remain skeptical about China, Joy Global , Cummins , Emerson , Vale and (CAT) Caterpillar say otherwise. Remember, Caterpillar still hasn't fallen much since that last so-called horrendous quarter. Oh yeah, it was bad -- but, alas, not bad enough. It's kind of the exact situation we have in China itself.
Random musings: This is total book talking, but you have to admit that the explosion in volume for Facebook might, at last, mean that it is ready to churn through the miserable $38 level. I do believe people are misjudging the video product that is sweeping young people's attention even as it has eluded that of Wall Street.
Also, what was with that ridiculous Gap decline? Oh, come on.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long F, ETN, GE, VGK, JOY, CMI, EMR, VALE, CAT and FB.
3 Things Needed to Kill a Cult
Posted at 3:21 p.m. EDT on Monday, Aug. 5
What does it take to stop a cult stock? What can reverse the price of Tesla or Netflix or Amazon ?
First, it's harder than you think. These are stocks backed by products everyone loves. Last week I took a hard look at the new BMW electric car, the one that goes 100 miles on one tank and I said it had none of the panache of the 180 miles per tank that the Tesla has. The fact that BMW's being branded as a city car leaves me cold, too. How many chargers are there in the city? The Tesla's a driving wonder. It is without a doubt the most sought-after car I have ever seen. Yet there are tons of non-believers everywhere.
When I was at the Deliving Alpha conference, a young buck kind of guy comes up to me and says he's just kiting, hasn't paid the fee for Delivering Alpha, he just wanted to see me about a job prospect. Some people remain under the delusion that I have a lot of jobs to give as I did a decade ago. But I played along, even as I felt proprietary enough to almost want him thrown out, and I said, "give me your best idea." He said, "Short Tesla." First, I asked why. He said the sales numbers are inflated. I asked him if he had ever tried to get one? He said, "No." I urged him to go to the Short Hills Mall dealership and try to get on the waiting list. He didn't know there was a dealer or a waiting list. Unimpressive. Then I asked him, "Have you ever driven one?" He said, "No." I was wide-eyed and said, "Why do you insult me with your lack of homework?" I am as miserable to arrogant professionals as I am nice to unsophisticated amateurs.
So he said that it was only a matter of time until the novelty wore off. I asked, "Do you know how many Teslas have been sold in Europe?" He had no idea. I said, "How about two? Is that novelty about to wear off?"
I think that Tesla's loved from afar, but not Netflix. In a week, "Breaking Bad" starts its last season. I heard Vince Gilligan, it's amazing creator, speak on another network about why his show is a success. He said it was simple: "Netflix." Before Netflix it was impossible to get into a new drama. Not anymore. That, more than original content, drives people to Netflix. Amazon's so loved it's obvious. Amazon Prime is like Costco , a membership and it gives you automatic two day shipping, something that's getting cheaper and cheaper for Amazon to do with the addition of all-new warehouses. That cuts the vig to United Parcel and is a huge win for both the customers and the cult.
So, the un-stoppability of all three is extraordinary.
Second, you need to see insider selling of the massive variety. To sustain the cult you need the managers of it to believe, too. When they sell you are in greater-fool territory. We just haven't seen that happen. It's something that I think a lot of the analysts thought would happen, particularly with Tesla, but it hasn't occurred.
Third, we need to see financing dry up. Unless a company's about to be shot and left for dead these days, there is financing and that's the case for all three of these. Tesla could easily get a state loan to build a plant. We heard from CBS on its call how much it needs Netflix and will pay. Amazon could issue three billion in bonds of different tranches and I think they would all be lapped up.
Now, here's the tricky part. You need ALL THREE of these to occur. Any one of them won't kill the cult. Without them you could see ridiculous price targets be set: "Tesla goes to $400!" And who is going to argue with that, especially in an up tape?
Now when Tesla started its remarkable run there were tons of bears out there, many of whom believed that the fated last conference call, which was a total game changer, was a total fraud. But ask Bill Ackman about total frauds. Until you get the SEC involved, those calling fraud don't have a leg to stand on. And given that these are all cults, valuation means nothing.
So, be careful. I totally understand why you would want to play. You don't know when the three Achilles heels will play out -- if they ever will -- but the long side, preferably with deep-in-the-money calls, most likely, is the way to go.
I wish more people understood the concept of the cult. In the old days there were always several dozen of them and typically they were losing fortunes, not the case with these three. In fact, if Amazon wanted to show a huge profit it could do so tomorrow. Same with Netflix if it shuttered international. Tesla? Not going to happen any time soon.
Still, these could run some more. It is just a fact of life.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.
- Europe and China: Are they done going down?; and
- What does it take to stop a cult stock?