Not a day goes by that someone doesn’t ask, “Why do you like Jay Powell so much?” They would ask if I was friends with the chairman of the Federal Reserve, or assume I knew him before I got the job. Not. Didn’t know him. I have spoken with him only once – and as part of a group – since he took his position in 2018. To understand why I like Powell, just look at the arc of what has happened in the past year and you will know that he critics should be on the heels, not people. Go back 12 months, and all you hear from the billionaire hedge fund manager – who is so happy to get on TV because it’s endless – is that Powell is too loose with monetary policy and is too late to try to curb inflation. But then he raised interest rates faster than anyone – to the current target range of between 4.25% and 4.5%. It rises from 0.25% to 0.50% in March 2022, when the central bank makes its first hike in a tightening cycle of 25 basis points. He was already tough as nails. He was impatient and ordered. Jump to today, and you never hear that Powell is so soft and that he is letting go of inflation, even though much of the inflation is related to foreign issues such as China’s restrictive Covid policy and Russia’s horrific invasion of Ukraine. At the same time, Congress along with President Joe Biden are spending fortunes on engineering-heavy jobs when we have a shortage of engineers. Along the way, the disparity between rich and poor grew rapidly, with inflation hitting the latter harder than the former. The rich, after all, allow every car company and homebuilder to raise prices. Covid is stopping the middle and lower classes from doing better. The whole situation, poisoned by the fractious press that Powell chooses to deal with on a regular basis, is extraordinary. But he has handled it all. Which brings me to the Friday market. The unemployment report released on Friday morning showed wages grew more slowly than anticipated, increasing 0.3% in the month when economists had expected 0.4%. Bonds are up a tad and it looks like a relief rally. Until we got a report from the Institute for Supply Management that showed the service sector contracted in December as new orders and production both declined. Where are the critics then? Why don’t the people who think Powell is a doofus speak up and say he’s right? Those two predictive numbers are a real green light for the rally. On top of that, the rates show that we are not going into recession – even I hear that endlessly all day – but there is suddenly an optionality for the Fed; it is sure that it is easier to stop recession than inflation as countries in Europe will tell you. We are now faced with the prospect of weaker earnings and a large number of cuts. But we also know that stocks have reflected much of that negativity. A tale of two markets We have a truly bifurcated market though. We have a market that has a single $3 trillion dollar stock in Apple (AAPL) and stocks that are worth hundreds of billions of dollars, and many more stocks that are $150 billion or less. We also have a division between tech stocks and everything else that is fascinating in the dichotomy. Consider two contrasts: Amazon (AMZN) and Micron (MU). The first one has not announced the low income, only the feeling of having to worry because they can hire 300,000 more people than they need. A look at Macy’s ( M ) preannouncement on Friday suggests that consumers are no longer extravagant. The other one, Micron, has now told you three times that things aren’t getting any better. In fact, it got worse. There is a glut of chips bigger than ever and it has spilled over from personal computers, where the decline is up to 19% per year, to mobile phones, where there is a slowdown around the world that is mostly related to China and the zero-Covid policy. November, Micron shares were unchanged. But Amazon’s stock actually dropped from $120 to $86. Why? Because the slowing economy will reach a point where the multiples of stocks like Micron will shrink until earnings fall. Then the multiples rise, but the fight is easy compared to the size. This is the basic process that happened this year. But Amazon? We don’t know what the truth is. We only know that it is very high. The stock has been cut in half but that doesn’t mean much because the capitalization is almost $900 billion. That is so big that the earnings are better, which will not happen until there is cost rationalization. Period. Any company as big as Amazon caught in a recession will be worth less. You have to get the right number, the number of times it has to go down, the income has to go down and only then it will go up some in the faltering income but it is easy to compare. In that sense, Micron is ahead of the mega-caps in the process of reaching the bottom. What about Alphabet (GOOGL), Microsoft (MSFT) and Meta Platforms (META)? Same deal. The market capitalization is very large, and with Alphabet and Meta the multiples are very small because they are based on advertising and marketing and therefore will go down. It’s the first thing you cut out in a recession. That’s why enterprise software companies are so valuable: potential clients have done without them and will do so again and new customers are hard to find. Apple is an anomaly. The market capitalization seems huge, but it may be true because of the service revenue. Meta Platform’s market capitalization may be correct. But TikTok should be banned, more money is invested in Reels and not metaverse, metaverse should find a different delivery system, plus WhatsApp should be spent 10 times, which means it is worth $ 100 billion. That many must be true. All this will happen in a slowdown – but not a recession – which Powell engineered most deftly. There will be two markets. One is filled with huge stocks and will remain a donor until they are given real multiples, watch the multiples shrink, and then look back up because estimates are higher but comparisons are easier. Other markets, including stocks like Micron, will trade as they would in any recession. That’s why I’m so angry with those who say the market is “finished.” There is no “market”. There are two sets of companies: one with reasonable price-to-earnings ratios, and one with unrealistic multiples. The largest market capitalization still has an unreal P/E even though it has shrunk dramatically in the past year. The basic processes for most companies have already taken place, so I’m not afraid of the upcoming earnings season. But the bottoming process for high-growth technology is quite unfathomable because it was never valued right in the first place. The basic process for special purpose acquisition companies, or SPACs, and crypto is absent, along with almost all initial public offerings starting in 2020. There may be 1,000 stocks and a large crypto presence. So, one market is actually quite good. The rest of the market is terrible. You just have to realize that the scary part is finding price-to-earnings, and until you get one that’s equal to 17 times the S&P’s earnings, it’s probably not going to happen. That is why we are very concerned about Microsoft and Nvidia (NVDA) because they are in the process of multiple rationalization or rerated. We are worried about companies like Salesforce (CRM) with multiples that are still too high, we are worried about Alphabet, Amazon and Meta because the multiples are illusory-too high because they depend on advertising. You just can’t have enough rerated stocks, which are going to be winners because of the pressure from inflation, the dollar and the supply chain is easy and that headwind is a tailwind. You cannot have mega-caps until the process of realizing the real multiples begins. It will happen. This is happening now for some companies. This is what worries me the most. The good news? They represent a fraction of the company there. The bad news? They represent a gigantic amount of market cap that must be lost. I said that we are only half. (See here for a complete list of stocks in Jim Cramer’s Charitable Trust.) As a CNBC Investing Club subscriber with Jim Cramer, you will receive trade alerts before Jim makes a trade. Jim waits 45 minutes after sending a trading signal before buying or selling shares in his charitable trust portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing a trade alert before executing a trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO THE TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH THE DISCLAIMER. No fiduciary duty or duty is, or is created, pursuant to the receipt of any information provided in connection with the investment club. No special results or profits are guaranteed.
Jim Cramer at the NYSE, June 30, 2022.
Virginia Sherwood | CNBC
Not a day goes by that someone doesn’t ask, “Why do you like Jay Powell so much?” They would ask if I was friends with the chairman of the Federal Reserve, or assume I knew him before I got the job.