XOM, APC, M, SBUX: Jim Cramer's Views
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The Oil Gauge Is No Longer Working
Posted at 6:26 a.m. EDT on Thursday, Nov. 12, 2015
Oil has suddenly, once again, become a huge quandary when we try to figure out the direction of the overall market. We know that, for months now -- perhaps even this entire year -- hedge funds that trade on relationships between commodities and stocks have sold stocks whenever oil has broken down.
The reasoning behind that trade is pretty simple: If oil is going down then the economy is not strong enough to go up on its own, so if the Fed tightens, we will be right back in the soup. This is the "oil as barometer of strength/weakness" dichotomy that kicks in every time oil goes below $45 -- as it is right now.
I have always thought this a tad wrongheaded, because the vast majority of the companies in the S&P 500, close to 85%, are inversely correlated to the price of oil -- meaning their earnings go up if oil goes down. So, the counterintuitive nature of the averages going lower when oil goes lower should not be lost on you, even though it is clearly lost on the vast majority of big-time traders, out there.
Here's the issue, though. When you see outfits like Macy's (M) - Get Report crash right before your eyes, and you know that the Macy's shopper benefits from lower gasoline prices, you really get thrown off. One of the great undercurrents of this moment is that lower gasoline will translate into higher purchasing power. But the decline in Macy's earnings says, "Not so fast, the decline isn't equaling additional sales."
That's what made yesterday so jarring. Oil going higher may help in the world of stocks, but we know it is bad in the real world. Yesterday, we saw that oil going down hurt the world of stocks, and, when looking through the prism of Macy's, didn't help in the real world, either.
A plague on both stock and real-world houses.
Worse, yet, the saving grace of oil had been the possibility that the winners, those with good balance sheets and lots of liquidity, would start buying up the losers. The deal on everyone's lips was that ExxonMobil (XOM) - Get Report would buy Anadarko Petroleum (APC) - Get Report now that the Macondo claims are behind it. The claims had acted like a poison pill for this great exploration and production company, and now that they are resolved, there were lots of reports that Exxon would make a move.
Instead, we learned in one 36-hour news cycle that Anadarko had approached Apache (APA) - Get Report with an all-stock bid, causing Apache's stock to soar on the leak while Anadarko's got hammered. Then Apache vetoed the bid and Anadarko felt compelled to issue a release saying such.
The result? Apache's stock, which had spiked, got crushed and Anadarko's stock after rallying momentarily, got blasted down anyway.
So not only did we lose the commodity bid underneath, yesterday, we also lost the takeover story that had kept things percolating. (For a full list of what might be taken over next, see my video with Dan Dicker yesterday).
Now we are in the difficult position of not gaining from oil weakness through retail earnings, and not gaining from oil takeovers through crude weakness. Both were part of the pall cast over the entire market.
What happens now? What do we want? Bulls are back in the ridiculous place of wanting to see oil go higher -- especially if it doesn't even seem to be helping anyone that it's lower, and definitely hinders all of the companies that have come public that are related to the oil boom.
Unfortunately, the economy doesn't seem strong enough to take oil higher, and we are still getting increased volume from Saudi Arabia, Iraq and, soon, Iran. Plus, it looks like ISIS, which could always be a geopolitical disrupter, might be on the run because of Russian and Kurdish fighters.
You add it all up and it becomes part of the bear case, not the bull case, and it only exacerbates fears that the Fed will tighten and send us back into the abyss of no growth whatsoever.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no positions in the stocks mentioned.
Macy's and the End of Shopping as We Know It
Posted at 3:48 p.m. EDT on Wednesday, Nov. 11, 2015
Where is the money going to? What are people doing with their spare cash? Where the heck is the consumer spending? These are the questions that are plaguing all portfolio managers as they want to follow the money and right now it's leading you in shocking and startling directions.
First, let me just say that the single biggest buzz on Wall Street today, the most salient, gut-wrenching situation is the shocking decline in the business and stock of the American icon that is Macy's (M) - Get Report.
While few people actually expected Macy's to do well in an environment where the globe seems to be warming in front of our very eyes, the sharp selloff took the market's collective breath away. As Terry Lundgren, the chairman and CEO said at the very beginning of his conference call, "We had a very tough quarter. We are clearly disappointed with the 3.6% decline in comp store sales of owned and licensed businesses and the 8% drop in earnings per share. We believe that the retail industry is going through a tough period, that we seem to experience something like this every five to seven years or so and this one feels familiar in that regard."
Ah hah, here's the rub: It may feel familiar but it isn't. The last time we had a sharp decline in sales, as Lundgren talks about later in his conference call, was the fall of Lehman. Sales just stopped back then as the nascent recession we were having morphed into the great one, the worst since the depression that began in 1929.
We are not experiencing that kind of cataclysmic systemic event right now. In fact, it's the opposite. We just had the best employment report in ages less than a week ago. We are getting meaningful wage growth -- again a first. We have employment below 5%. If you didn't know any better we could have the band strike up "Happy Days Are Here Again." Things are so strong on the employment front that we can fully expect the Federal Reserve to feel compelled to raise rates when it meets in December. How can it not? If one of its mandates is to promote job growth then a victory lap rate increase can be justified.
Plus, disposable income is on the increase and the stock market, a terrific repository of savings, is hovering around its highs. Lots of money's been made and taken off the table, too.
Sure there are health care costs that have gone up but the out-of-pocket gasoline and heating bills are dramatically lower than a year ago. It's like a gigantic tax cut -- it's that huge for the average American. And let's not forget that for all of the talk that the Fed has to raise interest rates they haven't gone up yet and credit is getting more plentiful according to almost all of the bank executives I spoke to after their earnings reports.
So, given all of those positives, again, offset only by the negative of higher health insurance costs, which I don't believe is all that much of a game changer, what the heck has happened here?
Why does this matter for us to begin with? Two-thirds of our economy is based on consumer spending. Two-thirds of the dollars of this gigantic growing economy are going somewhere and if we can figure it out we might be able to nail down some excellent investment opportunities. You see, when you get changes like those indicated by the crushing of Macy's sales you can make bets on where profits are going to be better than expected. As I teach every day, if you can find out where profits are going to be above expectations you can figure out what stocks might be best to own.
So let's start drilling down.
First, we have to figure out if the problem is just with Macy's. Has management "lost it?" Is there something totally awry with Terry Lundgren and his team? I have to say the answer is no. Sure Lundgren might be off his game right now or else he wouldn't be so disappointed in himself as he clearly is. But it isn't like this great merchant, who has done so much to revitalize Macy's, has suddenly checked out. I can testify that he is working harder than ever.
Second, it is true that the weather's been horrendous, way too warm for department stores like Macy's, which are filled with cold weather gear as you would expect in November. It is so warm that the company was abject that it would have to discount aggressively before the holiday to clear inventory. That's just horrendous and could make the next quarter terrible, too.
But let's not quibble, as bad as the weather is there's something else at work here.
I think the consumer's habits have changed, and changed not glacially but with lightning speed.
Two years ago, Howard Schultz, the visionary who runs Starbucks (SBUX) - Get Report, famously opined on what could be called the death of the mall. The end of shopping as we know it. He talked about how a combination of time constraints, technological breakthroughs, cheaper prices at more convenient venues and experiential cravings magnified by social media were drilling nails into the coffin of the traditional mall shopper. The conference call was a total show-stopper. I listened to it three times because the numbers, while soft that year, didn't seem to fit with the dire thesis Schultz laid out.
Turns out he was just a couple of years too early. I think his predictions are happening now.
Take these shoes. These are your basic Rockport oxford wingtips, which I have worn ever since I was a spokesman for Rockport back in the late 1990s when I could still do those things. I go through these things like the leather chowed down on by the hapless doomed Donner Party in the early winter of 1846. That's a nod, of course, to Mad Money head writer Cliff Mason, whose birthday party we will celebrate in absentia this evening. I initially went to the Macy's at the Short Hills Mall to buy these wingtips for $120. But once they wore out I went online to find them. Macy's, which has a decent website, featured them for $109. But then I went to Amazon (AMZN) - Get Report, where I am a member of Amazon Prime and I found them for $101. Click. And not just click on a desktop. A click on a cellphone. Round the clock shop right from this.
And do you think that there's any wonder that Amazon traded once again to an all-time high of $671, tacking on another 11 points on the same day that Macy's stock fell 6 points back to where it was in February of 2013? I don't think so.
Bricks and mortar just ain't working here. To make matters worse for Macy's, by the way, it threw cold water on plans suggested by an activist to monetize some of that real estate into an investment trust, which caused further downside pressure and made you realize that the physical plant for all the attempts to call out other ways that seem to make it competitive with Amazon, like easy pickups or returns, still can't be effectively monetized vs. Amazon.
Second, differentiation isn't there. Almost nothing that Macy's sells is so different so special that it can't be gotten somewhere else. It's largely a house of brands with brands that are in too many places, hence the big declines in all the apparel stocks today. We have too many stores selling too many of the same goods.
Third, homes are rising in value. If a consumer is going to spend at retail it's very clear that spending is going to be directed at improving the value of the home. If you listen to Home Depot's (HD) - Get Report conference calls you will know that we are finally to the point in this country where people feel that buying goods to improve the look and feel of homes is now regarded as an investment, not an expense.
Fourth, when the consumer feels like splurging it doesn't do so at the mall, it does it on a trip. We know, for example, that cruises are booked solid. So are theme parks. The consumer takes the show on the road, not the mall. Making matters worse far Macy's, the strong dollar is discouraging foreigners from making the pilgrimage to the flagship Herald Square store in Manhattan.
Put it all together and what you have is a secular shift away from the browsing mall shopper to the user of the browser on the cellphone who chooses among the cheapest and most convenient offering.
It happened fast. It's happening now. And sadly, at least for now, it isn't happening at Macy's or pretty much any other old-line department store here in the U.S.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long SBUX.