Why China Matters; Whole Foods' Walmart-like Move: Jim Cramer's Best Blogs

Catch up on Jim Cramer's ideas from this past week, when wrote about the true lesson of China's market bottom, and why Whole Foods' share buyback plan is a blunder.
By Jim Cramer ,

Jim Cramer fills his blog on RealMoney every day with his up-to-the-minute reactions to what's happening in the market and his legendary ahead-of-the-crowd ideas. This week he blogged on:

  • The true lesson to come out of what happened when China's Shenzhen hit bottom.
  • Why Whole Foods Market is making a mistake with its large share buyback plan.

Click here for information on RealMoney, where you can see all the blogs, including Jim Cramer's -- and reader comments -- in real time.

Why the Chinese Stock Market Is So Important

Posted on Nov. 4 at 6:43 a.m. EST

We know that only 5% of the people in China are directly involved in the Chinese stock market. We know that the market itself seems to be rigged by the government, and that stocks simply close down when sellers appear. We know that the government manipulates data and that its central bank has no transparency at all. Just last night, the bank mistakenly released some bullish comments about linking the Shenzhen exchange to Hong Kong that were five months old and it caused the Shenzhen to rally more than 3%. Talk about phony!

But for all of our derision of the Chinese stock market, it's pretty darned clear that its bottom on Aug. 26 is the bottom that changed the world. If you go back to that day you will see that the index bottomed at 2927 in what now looks to be a panic low.

If you recall those dark hours, we would spend much of the night watching what seemed to be the Chinese government battling beleaguered sellers, insider sellers and short-sellers, taking them all on with a series of new rules, penalties and tough talk about the patriotic need to buy and hold. It was enforced Warren Buffett-ism, and it was laughed at and scorned by so many smart people that you figured it was only a matter of time before this index really crashed into oblivion.

Forget that the index had kinda sorta crashed already, falling from 5166 on June 12 down to that once unthinkable 2900 level. What passes for intelligentsia in this business -- the hedge funds who buy puts and short anything that seems like it's in trouble and then blasts it out to everyone -- panicked badly at that level and we got a cathartic selloff in our markets, particularly the industrials.

Things got so bad at the really darkest hours of that Shanghai index rollover, that the Fed let it be known that it had to go on hold because of worries about China.

Not only that, but we got rumblings that we had found the next Long Term Capital, the next black hole or black swan or black Monday or whatever that would pull us all down: Glencore (GLCNF) , the giant, secretive European trading firm that was into the banks for $50 billion -- or was it $100 billion or perhaps $200 billion? Every time I heard about it, the amount -- the exposure! -- grew. Glencore sounded like a made-up Bond villain: It was capable of bringing down the Western world on a copper bet, not unlike how Goldfinger was going to bring down the Western world on a gold bet, by tainting Fort Knox with nuclear waste.

Well, now, look back. The Chinese government won. They fought the good fight against the short-sellers, they arrested people for spreading truth about stocks, and they managed to shut down insider selling. They backstopped every stock that could take the index down and they calmed things to the point that we are now up 500 points from that bottom. Not only that, but the consumer has accelerated in strength since then. We know from Action Alerts PLUS charity holdings Apple (AAPL) - Get Report and Starbucks (SBUX) - Get Report , from McDonald's (MCD) - Get Report , from Nike (NKE) - Get Report and from Alibaba (BABA) - Get Report , that something's changed in China. Things are better with the consumer, something that's been buttressed by car sales, which have accelerated and are, in many cases, above where they were last year at this time.

And now we have learned, as of last night, that Glencore had a real good quarter. Its trading operations made more than $2 billion. Its debt reduction plan is right on schedule. Sure, the metals it mines aren't doing much better. But that hasn't stopped the companies involved in those segments -- think Freeport-McMoRan (FCX) - Get Report or Caterpillar (CAT) - Get Report -- from rallying, so why should it stop this one from going higher.

Now, remember, in this market, there are no all-clears. It looks like the Chinese government's global bond sales brought enough money home to stabilize the stock market, but it hasn't stabilized their manufacturing growth, just their consumption. We have no idea about how Glencore's really doing. But we do know that both China and Glencore seem to be off the critical list, and we know that because the Shanghai index and Glencore's stock are alive and well and exceedingly profitable vs. where they were back in those nasty late August days.

My conclusion? Sure, keep deriding that Shanghai index, but the truth is that when it bottomed we bottomed, and when it bottomed the black hole that was Glencore got filled in. The industrials and oils, which had been in a tailspin, were saved. And, with only scattered moments, we haven't looked back since then.

Whole Foods Is Acting a Whole Lot Like Walmart

Posted on Nov. 5 at 12:23 p.m. EST

Let me start out with something positive. I have a Whole Foods (WFM) about 15 blocks from me. It's gorgeous, fun, rooftop lunch, amazing local product, right on the banks of a river that's clean -- or at least a section of the Gowanus that looks beautiful. It's pure joy and a Saturday outing for me.

OK, now the reality. In a business that lives by same-store sales, one where you can actually measure how stores do year over year, Whole Foods is King Midas in reverse, with comparable stores dropping 0.2% in the quarter ending Sept. 27 and a further 2.1% in the quarter through Nov. 1, 2015. Gross margin? Coming down, declining 96 basis points to 34.5%, because of an increase in cost of goods sold. Sales going down, expenses going up.

Whole Foods' response? Take a huge chunk of the bountiful cash the stores generate, $132 million this quarter alone, in part because of its industry-leading $970 per square foot in sales, and buy back a billion dollars worth of shares and then borrow up to another billion dollars more, a lot of which is expected to be used to buy back even more of this $10 billion market cap company.

The company's eager to invest in technology including digital to convert its strong online presence -- their word -- and scrapping legacy platforms including at the register. It's spending on the cloud where it admits that it is behind in investment. It talked about improving customer loyalty. And it is going to launch a second growth vehicle, 365 by Whole Foods, which is, they say, a "streamlined, value focused format" serving underserved communities.

To which I say, do you really think it is a great use of capital to buy back stock when you have underinvested and need to get back to basics, as the company said on the call, a concept openly derided by a very good analyst, Ken Goldman from J.P. Morgan, who asked "What have you been doing that's not basics, so to speak?" which was much more of a rhetorical question than one designed to build a new model, never a good sign.

This on top of RBC Capital's Bill Kirk, who questioned whether new attempts to fix point-of-sale systems and loyalty programs will work given that the company has promised to improve on these same issues two years ago and hasn't succeeded. That's called open rebellion and it happens when frustrated analysts question whether the company recognized the tough -- not dire, but tough -- straits it is in with so many companies moving in aggressively to take share, from Walmart (WMT) - Get Report and Target (TGT) - Get Report to Kroger (KR) - Get Report and of course Amazon (AMZN) - Get Report . Interesting that this stock is more expensive than all except Amazon, even as the company's so eager to buy back a ton that it could hurt its biggest asset, a pristine balance sheet.

Now, here's the rub. We have to ask ourselves is this buyback like the Walmart buyback, $20 billion over two years, precisely when it should use every penny to fend off competition and re-invent with new people and systems and a customer experience that is uniformly better? Should it be used to help lower prices on some items, with a tactic that's not really a race to the bottom as the company suggests?

I don't know. The two, Walmart and Whole Foods, once leaders in their spaces do seem analogous. But let me bookend this missive with good news: Whole Foods can figure this out. The company can get back on track. It can experiment with 365 and it can reinvent with technology, and social mobile, cloud and artificial intelligence to improve the customer experience.

But can it do both that and spend a couple of billion on buying back shares? Is anyone that good?

Sadly, the answer is, I don't think so, not even the once mighty Whole Foods, which I think needs every penny available to turn around those same-store sales because that dogged metric, not sales per square foot, or a fantastic Brooklyn eating and shopping experience, filled with local, fresh product, is the true sign of profitable growth that all investors crave.

At the time of publication, Jim Cramer's charitable trust Action Alerts PLUS was long AAPL, SBUX and TGT.

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