My game plan for week ahead after Friday’s surprise rally

by newsconquestJune 4, 20230122

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What the heck really did happen on Friday, when the Dow jumped 700 points on a strong jobs reading ? Why such a viscerally positive reaction to an employment number that was hotter than expected? Was it because wages didn’t spike? Was it all that perfect — a Goldilocks report? Here’s my take on Friday’s rally. Going into the debt ceiling crisis, there was a belief that House Speaker Kevin McCarthy couldn’t control his own Republican party. Senate Majority Leader Charles Schumer wasn’t much better off with the Democrats. Both had lost control of their parties to the extremists. That meant the United States would default on its debt. It seemed pretty logical. I truly believe the extremists never believed a default would mean more than a few weeks of setbacks and more brinkmanship. Who can blame them? President Joe Biden lamely floated that he could invoke the 14th Amendment to avoid this and any future debt limit fights; the amendment includes a clause that some legal scholars say overrides the statutory borrowing limit set by Congress. No matter what, it was pretty clear that chaos was our destiny. But when McCarthy and Biden agreed to temporarily suspend the debt ceiling and cap some federal spending in order to prevent a default, we got a deal that was even less contentious than the 2011 bargain . (The coming together brought to mind the legendary coalition of President Ronald Reagan and House Speaker Tip O’Neil in the 1980s, memorialized in Chris Matthews’ “Tip and the Gipper: When Politics Worked.”) It was the compromise debt limit deal — not the employment number — that caused the market to rally. Sure, the jobs report showed wage inflation was cooling, which is good news in the Federal Reserve’s fight against inflation. But the job creation in May and the revisions were insanely strong. What matters most is that Fed Chair Jerome Powell, who is far more powerful than the independents on the Fed’s board who have such a hard time keeping their mouths shut, is reasonable. He seems to understand that it’s time to wait a bit on any more rate hikes. Not because he thinks things are cooler, but because he actually doesn’t even know. We have a young workforce coming into the market akin to when I got out of school in 1977 — nary a job to be had anywhere. This is potentially a monumental moment. The new debt limit legislation sets the date for resuming federal student loan repayments, which have been on hold since March 2020. We have the end of Supplemental Nutrition Assistance Program (SNAP) benefits and other pandemic breaks. Why not wait two months to see if unemployment naturally goes up and wages come down? To sum things up: We came into Friday shocked that there was a shocker of a deal and a not-red-hot employment number (at least one that didn’t send rates higher). This is what triggered the long-awaited buying of stocks outside of the Magnificent Seven that have led the market all year: Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), Tesla (TSLA), Meta Platforms (META), Apple (AAPL), and Nvidia , which briefly joined the $1 trillion valuation club. We each have our own way of monitoring these things. I used Club name Caterpillar (CAT) as my judge. On Thursday afternoon, CEO Jim Umpleby went into the lion’s den of Sanford Bernstein and told a tale about de-cyclization. Shares of the heavy equipment maker had a tiny snap back. One day later and armed with the budget deal and the employment number, CAT shot up seventeen points — an unheard-of short squeeze. This took the stock back to when it reported a good number that was converted into a bad number by bearish analysts still unwilling to admit that the company had changed its bi-polar ways. Of course, the bears would say that it only went up because of one more silly stimulus by China, this time to adjust rents. I say Caterpillar went up because it was overly shorted, like so much of the market, including retail, health care, financials, other industrials including the commodities (the oils!). We even saw the imperfect chipmakers and heavily challenged enterprise software stocks come alive. The shorts were correct to press their bets if there was no debt deal and we got an employment number that was a steamer. But they were wrong on both counts. This plus a rare wave of new money coming in and massive buybacks by companies capable of plundering after their reports, caused the broadening that had been bemoaned as non-existent as recently as the day before. You could argue it was a short squeeze of monumental proportions. A short squeeze happens when short sellers having to buy stocks to cover their short positions, pushing prices higher. But every time there has been a broadening since FANG, it’s always been called a short squeeze. That’s just how things work, although it’s never been acknowledged by anybody. Which brings us up to date for Monday. We have a blackout of the Fed speakers. We have no real macroeconomic data. We have no landmines of earnings. And no Fed meeting until mid-June. A true interregnum. We are going to have to take more things off the table if we get a rally into an overbought setting. Yes, we have some real stinkers — Disney (DIS), Foot Locker (FL), Emerson Electric (EMR), Estee Lauder (EL) — and we can battle them. But the important thing is that we have so many winners that we have to ring the register on some stocks if all goes our way. Of course I obsess on the losers. I didn’t think that Fabrizio Freda at Estee Lauder and Mary Dillon at Foot Locker could both blow it that badly. I had reason to dislike the Emerson team, but it still gave me more than I can handle. I have no idea how Disney’s stock could be this weak in a long-on-money-short-on-time moment. I am furious at myself for not seeing around any of these corners. But I am not going to throw good money after bad and I see no good on these names — yet. This leaves us with the big question: Which winners to trim? As long as we are not subsidizing losers, we aren’t breaking protocol. But we have two tasks. One is to come up with a new name that hasn’t moved that we actually like. And two is to trim into strength as we get overbought. I want both resolved by our next Club meeting on June 14. That’s what I am working on right now. Do we need so much Salesforce (CRM), even as it reported a good quarter all things considering? Do we even need Advanced Micro Devices (AMD) when it has nothing to rival Nvidia? I just don’t know. I want the market to tell me what to do. I think it will. Where does this leave us? In a sanguine week that will allow us to see if the short squeeze continues. If it does and continues to broaden, we can both peel some winners. See which caterpillars can develop into, well, Caterpillars. Maybe add Take-Two (TTWO), which gave us a two-year outlook, possibly aided by a new Grand Theft Auto game and better Nvidia cards. Just one of many ideas. But one Jeff Marks and I are trying to get our arms around. Some who read might ask: “Shouldn’t there be more of a thesis behind a bullish move?” I say no, no more than you needed in 2011, when the debt ceiling deal led to a fantastic rally because Armageddon was avoided. We cannot sit back and relax. But what we can do is accept that it is a better moment than we thought not that long ago. There are cracks. The Dollar General (DG) call was a compendium of weakness for the lower middle class and the Macy’s (M) call was a confusion of negativity. But who is to say that these companies just don’t have the “it” of Five Below (FIVE) or Lululemon (LULU). We are close enough to the infrastructure money wave to handle another rate hike if we need it. But Powell recognizes the futility of another rate hike right now because it lowers mortgage rates, making his job even harder. What we can do is watch and wait as battlegrounds get resolved — like CAT did on Friday. We can anticipate better things from a Johnson & Johnson (JNJ) — especially with a 3M (MMM) deal — and from GE Healthcare (GEHC). We can lick our Estee and Foot Locker wounds. And we can be glad that we got through the debt deal and wax in the wave of new money that will at last be coming in. No, we can’t be complacent. Too many needs for the shorts to save themselves. They have been run over in so many places that they have to make a comeback somewhere. Their number didn’t get so strong before the debt ceiling deal that they can’t all cover at once. Nevertheless, we have enough money to put to work if we want to in a new name that hasn’t moved and has a special situation thesis. But I do not want to be so relieved as to think there is no woods, just that we are out of it for now. Personally, the last few weeks have been hard ones, ameliorated by members who have made money with the club. Some mistakenly believe that we missed this entirely rally. It galls me because I gave up being a hedge fund manager years ago and I know the truth: This may be the best we’ve ever been, and this time it is for you, not the entitled class. I thank you all for letting us have the floor to help and not be tools of the traders who have infiltrated our ranks. So let’s take and make some gains and be ready for the next storm after the calm, wherever it might be coming from. Rest up. We have gotten past the systemic chaos into business as usual, where we can glow in a world where stock picking matters. (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 . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

US President Joe Biden, accompanied by Speaker of the House Kevin McCarthy, Republican of California, arrives for the annual Friends of Ireland luncheon on St. Patrick’s Day at the US Capitol in Washington, DC, on March 17, 2023.

Saul Loeb | AFP | Getty Images

Here’s my take on Friday’s rally. Going into the debt ceiling crisis, there was a belief that House Speaker Kevin McCarthy couldn’t control his own Republican party. Senate Majority Leader Charles Schumer wasn’t much better off with the Democrats. Both had lost control of their parties to the extremists. That meant the United States would default on its debt. It seemed pretty logical.

I truly believe the extremists never believed a default would mean more than a few weeks of setbacks and more brinkmanship. Who can blame them? President Joe Biden lamely floated that he could invoke the 14th Amendment to avoid this and any future debt limit fights; the amendment includes a clause that some legal scholars say overrides the statutory borrowing limit set by Congress.

No matter what, it was pretty clear that chaos was our destiny. But when McCarthy and Biden agreed to temporarily suspend the debt ceiling and cap some federal spending in order to prevent a default, we got a deal that was even less contentious than the 2011 bargain. (The coming together brought to mind the legendary coalition of President Ronald Reagan and House Speaker Tip O’Neil in the 1980s, memorialized in Chris Matthews’ “Tip and the Gipper: When Politics Worked.”)

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