- Why the industrials appear set to replay 2008;
- Paychex's strong execution; and
- why China's weakness will continue.
Industrials Can't Catch a Break Posted at 4:31 p.m. EDT on Friday, Sept. 30. Here's a piece I don't want to write. The industrials seem determined to replay 2008. It doesn't matter that things are much better for them. It doesn't matter that there is ample credit around the world, something that crushed them last go around. It doesn't even matter that none, not one, of the ones I am close to, Honeywell ( HON), United Technologies ( UTX), Cummins ( CMI - Get Report) or Caterpillar ( CAT - Get Report), has seen a slowdown. They all get whacked. This endless decline is playing havoc with the performance of anyone who is trying to keep pace with the averages. Owning them has been an anathema to making money. At the same time, the most overvalued and overstretched players are the recession stocks. But many of those have yield protection, and all are levered to the decline in commodity costs. If it weren't for the strong dollar, people would be raising numbers like crazy. > > Bull or Bear? Vote in Our Poll I see no end to the decline of these stocks if Europe stays weak, China weakens and we bump along a near-recession economy. I for one think these declines are pure panic. But there seems to be a hot potato effect going on here. No one seems willing to own them through this period, somewhat similar to the mineral and oil stocks that they now seem to correlate perfectly with. Oddly, the retailers, so geared to the "strapped" consumer, hold up great as the industrials, which are levered to worldwide growth but especially emerging growth trends, just can't stop plummeting. Bottom-fishing has become a huge sucker's game, even for those companies that are seeing strong demand. We got a great channel check out of Caterpillar this morning, and no one cared at all.
Good Execution Beats a Dividend Posted at 12:20 p.m. EDT on Wednesday, Sept. 28. Here we go again. A division of Darden's ( DRI - Get Report) disappointing. This time it is Olive Garden with some truly hideous numbers: a 2.9% decline in same-store sales. That, plus some very negative commentary about challenges and inflation and still one more promise to revitalize stores, makes me feel that, while there's a 3.8% yield, maybe it's not worth waiting for this company to get its act together. Contrast Darden with Paychex ( PAYX - Get Report), which I talked to last night. Here's a company that is levered to hiring and business formation that should be getting hammered, because we don't have a lot of hiring or business formation in this country. Has Paychex decided it will sit around and wait for things to get better? Hardly. It has created services, including human resources outsourcing options, that enabled it to beat numbers and report 13% growth. But that's not enough. Paychex, like Darden, is also paying you to wait until things do get better in its core payroll processing business. When hiring gets better and people have more confidence to start businesses, you can bet that Paychex will be seeing a better than 2% increase in paycheck accounts. Plus, when hiring gets better, it is unlikely that the Federal Reserve will keep short rates as low as they are, and Paychex makes a lot of money off the float, what it gets between when it is paid and when it pays out to workers. The returns couldn't be more paltry than they are right now. So, one company, Darden, is always telling you that it is about to get better and return to the old days of growth. The other company, Paychex, makes no promises; it just keeps finding you new ways to stay ahead of the curve and the numbers. In the end, this comparison is about execution. As much as I like going to both Olive Garden and Red Lobster, as much as I think Capital Grille is the best of the steak joints, I can't recommend the stock anymore.
Expect China's Weakness to Continue Posted at 10:44 a.m. EDT on Friday, Sept. 30. I am tired of hearing how healthy China is. Tired of it. China is obviously not that healthy. We have multiple inputs that seem incredibly weak right now, and they can be ignored only at your own peril. Let's tick them down: First, there seem to be property problems galore. There seems to be a cessation of the gigantic buildout that has used humongous amount of copper. How else do you have copper plummeting seemingly endlessly? Same with coal. We hear coal pricing is up, but the coal stocks that export are getting killed. That has to mean the future is going to be weaker than the past. I know that Joy Global ( JOYG) said demand for coal equipment in China is showing no slowdown. But the coal stocks are terrific lead indicators. I am going with what they are saying to us. Aluminum? Frightening. I think that Alcoa ( AA) (AA) is a terrific company. But the stock just can't hold its own levels, and I think that Chinese demand for aluminum -- or lack thereof -- is behind much of the decline. Steel, forget it. The stocks say that China is dumping like crazy. And let's not forget Wynn Resorts ( WYNN), which is a direct China play. It's signaling a dramatic drop-off in business. The decline in Las Vegas Sands ( LVS) tells me that the fault isn't Steve Wynn's. The stocks of Tiffany ( TIF) and Coach ( COH) say the same. How can China be "fine" with these symptoms? How? What's really going on, given that we know China has innate growth to it, if only from the endless rural to urban migration? I think the issue is foreign demand for Chinese product. With the simultaneous disarray and slowdown in our country and in Europe, it is hard to see where the demand for China's exports is going to grow. At the same time, the energy costs, meaning oil, haven't come down, so it is difficult for the Chinese government to stop tightening. There's still tremendous inflation in China, both wage inflation and energy inflation. Given the inability of Brent crude, the price China pays, to break down below $100, despite the world's slowdown, I can't be optimistic that inflation can be tamed by China or by anyone right now. I don't care about all of the other minerals that are going down. I care about oil. I think that we have to be very concerned that China will become top of mind as a weak point in the fourth quarter. That's simply a huge negative, and we can't dance around it. We have to stop treating China as a constant that will help us and start thinking of China as a declining economy that can hurt us. That has to happen now if people are going to be able to invest or trade in this market. Take heed of Chinese weakness. It's not going away. It's accelerating. At the time of publication, Cramer was long AA.