WRONG! Rear Echelon Revelations: The Power of the Rate Cut By James J. Cramer [TheStreet.com] 10/21/98 12:15 AM ET
Rate cuts are powerful things. They make cyclical stocks go from being 900-pound weaklings to being titans.
Let's take Boeing (BA:NYSE). Here is a company that will probably not win a single order from these rate cuts. The airplane business seems saturated. The earnings, to be announced later this week, will disappoint.
Yet, there I am making calls on Boeing, thinking about whether I should get long it before or after the bad quarter. I am not even thinking about shorting the stock. I am simply trying to time the buy.
How can I not? Honeywell (HON:NYSE) reports a number that is nothing to write home about and it vaults three points, gets some upgrades and acts as if it is the Honeywell of old, which used to gap up three times every time the company spoke. Yet Honeywell just makes stuff for planes and factory controls, two businesses that, again, should not benefit from incremental rate cuts. These businesses need an economic boom to recover. But the stocks aren't waiting for them to develop.
Same thing with Caterpillar (CAT:NYSE). I was on that Cat conference call. Ugh. What a disappointment.
But in retrospect, a few days later I think, heck, if Cat could do that number and we get a couple of more rate cuts and some stability in Brazil and more dollar declines versus Komatsu (the real Cat competitor), I can craft a story to be long Cat.
Rate cuts make analysts tell new stories too. Guys I talked to who hated certain equipment and appliance makers three weeks ago now love them. (Really painful if you shorted them on that.) Analysts who had given up on washer and dryer companies now spin yarns of refinance payments flowing right to Whirlpool's (WHR:NYSE) bottom line.
It becomes mighty self-fulfilling.
That, again, is what makes it so hard to own the drugs. I have analysts making projections for Phelps Dodge (PD:NYSE) off this call that would make Schering-Plough's (SGP:NYSE) growth year over year look positively snail-like. I even let go some of my Anheuser-Busch (BUD:NYSE) so I could get more cyclicality in the portfolio.
How does it all play out? If we get another rate cut, the scenarios grow more rosy and I can sell my Cat to the next guy. But if we get still one more rate cut, I will wish I had held on to my Cat, or I might even buy it back, if profit-taking occurs.
This rotation must seem so silly to those holders of Philip Morris (MO:NYSE) or American Home (AHP:NYSE) who have never blinked and just silently booked those dividends and let their capital gains run. But to those of you who day trade, you know what I am talking about. Suddenly there is no Asarco (AR:NYSE) for sale. Amazingly, the Lennar (LEN:NYSE) offering has disappeared. Shockingly, Ingersoll (IR:NYSE) or, get this, Foster Wheeler (FWC:NYSE) -- which was at the bottom when I queried about it -- can't be bought fast enough.
Ultimately, if the Fed eases enough, economies do come back. But what happens before that is that money is flushed in from the sidelines as the short rates drop off. The risk-free money rolls into risky mutual funds. More Cat is bought. And the stocks anticipate the whole move. Which is why when Cat sells at seven times earnings, you know that the ball game is over, that we are at peak multiples and that the last dollar has been made.
Relax, we haven't even gotten started yet.
Random musings: See you on Squawk.
James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions.