- the "keys to the market" for 2014, and
- Bank of America's strengths.
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Behold, the New 'Key to the Market'
Posted at 1:01 p.m. EDT on Friday, Jan. 3
My partner David Faber and I used to joke around in the late 1990s about what stock was the "key" to this market. He wanted to know what mattered -- what people were really focusing on, in the same way a linebacker might key in on a quarterback's eyes. My keys sometimes were the same for months at a time. There was the run in Yahoo! (YHOO), which I said was historic right up until the company paid $5.7 billion in stock to buy Mark Cuban's company, Broadcast.com, to provide Internet radio.
It was kind of a watershed moment -- the benchmark of the overpaying insanity that defined 1999. Before that it was Pfizer (PFE), which rallied like a small-cap biotech right into the launching of Viagra.
Most recently I said the keys to this market were Tractor Supply (TSCO), Lumber Liquidators (LL) and Ulta Salon (ULTA). These were facetious keys, to a degree, because they were about high-growth retailers that wouldn't quit, propelled by momentum-buying mutual and hedge funds that didn't know how to quit. Lumber Liquidators and Ulta Salon have hit walls, and among the factors involved has been the killer of potentially slowing growth. Tractor Supply continues to percolate as a play on farmers buying their products from a cheaper, national chain, rather than their local feed-and-grain.
[Read: Greenberg: New Year Report for 2014]
But today I shocked David when I said the key to this market right now, right here, is General Electric (GE). I said GE because this morning an Oppenheimer analyst downgraded the stock from buy to hold, ostensibly in a piece that said that the company's restructuring is now in a transitional period -- which I think is Wall Street speak for a stock that's run out of gas. At this point, the research piece implies, the company's ongoing minimizing of finance and maximizing of industrial are baked into the stock, so it is time to move on.
Why is this stock the key to the market's next move? Because if this analyst is right with his downgrade, it means we are at the end of the period of industrial outperformance that began with the fourth quarter's strong labor reports. Stocks like General Electric have been leaders for some time, and although GE has not kept pace with the likes of such companies as 3M (MMM) or Boeing (BA), it did have undeniable momentum going into year-end.
GE sports a 3.2% dividend yield, and the company is transforming itself from its prior incarnation as a true financial dog with an industrial tail to a new role: an industrial powerhouse dominated by energy. So this one, to me, seems to define this moment. It epitomizes which stocks can go higher if the economies around the world get better -- and this is precisely my thinking behind holding it in my Action Alerts PLUS charitable trust. If the analyst is right, we are going to see some of these gains repealed, and the stock market is going to be a very rocky place until new leadership is found.
[Read: Are Emerging Markets Poised for a Rebound?]
Right now it's not clear who will be correct, as there are plenty of crosscurrents. Have autos slowed? That would be terrible for the industrials. The Baltic Freight Index, so sensitive to Chinese growth, has been weak for the last few weeks. Does this send us a negative signal that GE, a company with big Chinese contracts, could slow down? We have to be attentive to a host of commodities, as well as the labor report, in order to stay close to this international industrial conglomerate.
My bet is that this downgrade is premature, perhaps way premature, and that GE is going to return to the greatness it had when its stock was priced in the $40s. However, this time around I suspect the gains will be more sustainable. Yep, the Oppenheimer analyst is wrong, in my humble opinion, and I am putting my charitable money where my mouth is. I think you should, too.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long GE.
3 Reasons to Buy Bank of America
Posted at 11:15 a.m. EDT on Thursday, Jan. 2
I know I am talking my book, but I think this Bank of America (BAC) hold-to-buy from Citigroup is very important for three reasons.
First, the stock has stalled here even as things have gotten better, which puts investors on pins and needles thinking there must be something wrong we don't know about. I think this upgrade takes that off the table.
Second, rates are going the way banks need them to, especially the 10-year, yet investors still harbor a belief that higher rates are per se bad because they could hurt the mortgage business and have crushed the refi business. We have indeed seen a leveling off of mortgage applications, so that is a realistic fear. But remember, banks make their money off the net interest margins, the difference between the money they pay you and the money that they can invest, either risk free on the Treasury curve or through loaning, especially project loans.
The yield curve/CD spread investment is much more important than the mortgage business because it is considered risk free and therefore has no downside to investors. We know from mortgage lending that there could be considerable downside.
[Read: Beyond the 'Wolf of Wall Street': People Who Profited From Their Crimes]
Finally, with a nod to my friend and writing partner Matt Horween, the technicals can really propel this stock at this point. Now I know that the charts shouldn't "matter," but we have become increasingly chart oriented as the charts turned out to be the best predictor of making money in 2013. Given that the stock was appreciably higher even when other bank stocks were bottoming and has since fallen dramatically, this could be a clarion call for technically inclined investors to get long and chew through all of the overhead stock that's been there forever.