We’ve been relatively free of actions by the Treasury and the Federal Reserve for some time now. The intrusion into the market at the end of October and early November seems like ancient history. This week, however, could change all that. Two releases on Wednesday — the Federal Open Market Committee statement and the Treasury’s quarterly refunding announcement — could influence the process and provide a poor prism to the importance of the week’s earnings. That makes for a jumble, just when we hear from some of the most important quarterly reports of the earnings season, including Alphabet , Starbucks , Advanced Micro Devices and Microsoft on Tuesday, and Amazon , Apple and Meta Platforms on Thursday. If you recall, the combination of dovish Fed comments and a benign quarterly funding issued by Josh Frost— Assistant Secretary for Financial Markets and the most important man in finance — created the pivot that spurred the end of the year bull market that encompassed all stocks, before we reverted to pre-pivot action since the year began. If they stay out of the way, we can deal with the earnings and their consequences. It may actually give us a chance to rally on the backs of numbers that might be positive. I say “might” because this market needs more money pouring into it, more money from the sidelines, to continue to rally. We’ve been faced with a dilemma: The wonder of 5% risk-free Treasury bonds versus a bifurcated market led almost entirely by tech — the rest of the industry groups are doing nothing. I am not one that worries about breadth when it comes to the averages. They have advanced for most of the decade on the backs of tech, with the Significant Six — I am liking that a little more than Super Six for the weekend — and not the rest of the market anyway. We don’t asterisk the S & P now, do we? If we had more money coming into the market, the rally could broaden out. But that might stem only from money that would otherwise be sloshing around in money funds. If the Treasury goes more long term instead of short term, say one to seven years, we may actually drain even more money from the stock market because Lord knows there isn’t enough money right now to keep 10-to-30-year rates this low. It’s ironic: We are at a moment where supply of money and demand for goods are intersecting. The Treasury needs more money and it can get it if disinflation continues. Why not? These rates aren’t bad if we are going to see price increases slowing. The companies need more demand and they might not get it if prices for their products stay high. It’s a little more complex than I am making it. But let’s boil things down. We have two markets: the Treasury market and the equity market, with the first more powerful than the second, even if we can’t tell that in the scrum of earnings announcements. If the S & P is to go higher, we need to get a higher multiple on the earnings we are seeing. That multiple will be heavily influenced by the Treasury and the Fed. If the Fed keeps rates steady Wednesday with a dovish statement that keeps a couple of rate cuts on the agenda, and the Treasury continues its policy, set back in November, of financing with shorter-term paper, then we will at least continue January’s benign action. If the Fed signals more rate cuts, then we will be set up for higher stock prices if the companies deliver good earnings. The possibility of higher earnings so far has been controlled by supply and demand and the disinflation it is breeding, which may continue this week. We know that six, formerly, seven stocks are amounting to about 25% of the S & P and this week we have five of the six reporting results, Nvidia being the only one that reports later. Tesla was felled and taken out of the Magnificent Seven because of supply and demand. There just isn’t enough demand for Tesla’s vehicles and supply is overwhelming, so prices will come down. Therefore its multiple comes down on whatever earnings it can actually produce in that state of play. The other six have no such constraints. In fact, the magnificence of the seven had more to do with supply and demand of goods sold than we realized. None of the Significant Six has any inventory or demand problems. Hence the power of their earnings to generate the mask of a higher market price-to-earnings ratio. That should continue. Think about it: Alphabet has far more demand for search and YouTube advertising than it expected last earnings report and it can raise prices. If the company can somehow get more Google Cloud business, one that grows to, say, $10 billion, it will be off to the races. Microsoft has a viable artificial intelligence product in Copilot that will amount to meaningful earnings, which will be discussed by CFO Amy Hood in the middle of the post-earnings conference call. Amazon is in the same situation as Google — more demand for ads, higher ad prices. Apple will have a decent number, but likely guide down the next quarter because it has more supply than demand for handsets. Apple can finesse numbers with service revenue that has no supply issues. So we might be home free for those traditional winners, even as Apple haters will create a negative impression. It’s the rest of the companies that worries me. That’s because we are beginning to see the struggles that so many companies are facing because they raised prices too high and are now facing and reckoning. Take McCormick , a once very fine growth company that took prices up way too high during the pandemic, so high as to encourage private label competition and real inroads by Costco’s Kirkland Signature, which offered cheaper prices. Walmart can come in under, too. The result? The company has nil growth and is projecting a range of -1% to +1% year over year sales for 2024.To make its EPS projections, Walmart might have to take personnel adjustments. How many other companies are faced either with competition that comes under or supply issues because of gluts? How about chipmakers that are still working through excess inventory. The gut-wrenching cuts are yet to come. But there’s no way around it. The number of companies that are facing price cuts after outrageous run-ups, is rather startling. That includes cars, where an inventory glut is growing, and rentals because the buildings started post-Covid are only now coming on line. These issues of supply and demand are most likely going to figure large in the consumer price index two months from now, which will only help the case to cut rates. And who knows how things can play out if we get a weak employment report Friday with no gain in wages — something that might be possible simply because of the huge number of undocumented workers keeping wages down. This whole price cut issue bodes poorly for so many companies. For us, the impact could be felt with Starbucks. There we will see the power of the brand versus the competition (plus pro-Palestinian protests). But for many companies the competition and the weakness in the economy spells shortfalls, again making the money flow to the Significant Six. Expect more stories like McCormicks. So there is a bit of a bramble developing. The Fed wants to see prices come down and wages stabilize. It doesn’t look at bottoms up, just top down. So the central bank won’t see what we will see until next month with the impact on companies. It will see labor on Friday. The combination of margin compression and higher-than-normal rates spells deflation, not disinflation, but the trend is still incipient. The Fed won’t take action until the trend is the norm, which is why I think a March cut is off the table. I am still surprised that so many on the Fed were even pondering cutting when the GDP is so strong and we are sub-4% on unemployment. Fed Chief Jerome Powell doesn’t want his whole legacy destroyed by moving too fast when he is winning. Price rollbacks must occur because we know there’s gouging. There is too much sticker shock everywhere. For investors, it’s a question of avoiding the inventory-glutted companies — like the destocking nightmare of Dupont — and owning companies that can raise prices at will, like the Significant Six and fellow travelers. It can be done but not easily. We thought we would be okay with Dupont because the company gave us hope the previous quarter with comments about green shoots in electronics. Sure enough they got those green shoots, but the rest of their pricing suffered from destocking. We sold Caterpillar over fear of destocking, or more accurately the fear of the bearish analysts making up destocking stories and getting away with it. The one industrial area where there seemed to be no destocking issues was aerospace, and Boeing’s woes ended that hope. What a shame. Talk about once great. The company can’t even pin down the source of the recent problems, a result of Boeing deciding to become an assembler of the parts of many companies rather than a manufacturer of airplanes. Not to be too prurient, but it will be an exciting week. And it’s not just because of the deflation theme and the destocking nightmare, but because we have outfits like Apple where analysts are desperate to pounce on guidance to hang their bearish hats on. They win short term, but short term has been the ultimate sucker’s game when it comes to Apple. No matter. The set-up puts the onus on the bears. They can succeed, but only with help from an errant refunding schedule — go Josh Frost — and a sticky unemployment below 4% or onerous wage gains. I like those odds but our hefty cash position makes the odds awfully easy to take. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’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 ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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A trader works as a screen displays a news conference by Federal Reserve Board Chair Jerome Powell following the Fed rate announcement, on the floor of the New York Stock Exchange on Dec. 13, 2023.
Brendan Mcdermid | Reuters
We’ve been relatively free of actions by the Treasury and the Federal Reserve for some time now. The intrusion into the market at the end of October and early November seems like ancient history. This week, however, could change all that.
Sumber: www.cnbc.com
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