Cyclicals -- boy, am I sick of that impenetrable term. Can we take a moment,
-like, to figure out what the heck they are before the talking heads confuse us any more on the subject?
First, as Lou Rukeyser used to say -- or still may be saying, for that matter -- let's speak English. Cyclical companies are companies that need a strong worldwide economy to report up earnings. Forget about them. They are unimportant. We are not concerned with the corporate entities.
, on the other hand, are what matter to us. This is
, not some economist tome or a daily newspaper. Cyclical stocks are entities that go up when: (a) they get takeover bids from other cyclicals; (b)
decides that the drug stocks are too pricey; (c) polyethylene and other "-lene" price increases stick for more than four weeks; (d) container board price increases ever stick; and (e) some giant hedge fund buys calls on the
cyclical index, or CYC, sending the underlying stocks up. All these things are happening right now.
That's it. That paragraph is all you really need to know. Cyclical stocks have to be bought when business stinks and their price-to-earnings multiples are gigantically high, almost Net-like. They have to be sold when their P/Es are in the low single digits.
Don't believe me? The greatest cyclical short of my lifetime was
when it had a P/E of around 2 on forward earnings because those earnings never materialized. As prices move up for commodities, more capacity comes on line; as more capacity comes on line, prices come down; as prices come down, earnings are missed. Then foreigners dump stuff here and really destroy earnings. The multiple expands, horribly, to absurd levels. Analysts reiterate buy ratings all the way down, and they bury you as the stocks get killed. You lose money.
There are periodic rotations into cyclicals when economies are on the upswing. Because of turns in Brazil and Southeast Asia, we are in one now.
Can it be played? You have to trade these. You have to be incredibly nimble. You can't just own them. When the CYC makes a huge jump, you have to sell, and when it declines big, you have to buy.
You can do this as long as we are not in an earnings warning period when cyclicals fail to meet the numbers. We are not in that period, so it works right now, although 10 days ago, I put a short on in this index and made a decent amount when money rotated out of the cyclicals and back into tech last week.
I will rewrite this piece Saturday, but I wanted to get it off before I left for
this morning. See ya on "Squawk."
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in the stocks mentioned, although holdings can change at any time. 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. While he cannot provide investment advice or recommendations, he invites you to comment on his column at