Gimmicks Won't Smooth Things Over

 | Jul 29, 2014 | 4:21 PM EDT
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We're losing cycles and trying to make them up with one-off gimmicks, and it's catching up with us today.

You know, I want us all to be able to make the most money possible. I am accepting of any legal way to make money. If Windstream (WIN), a little, high-yielding telecommunications company gets a private ruling from the IRS that it can spin off assets into a real estate investment trust and create instant value, as it did today, than I am thrilled. If CenturyLink (CTL) and Frontier Communications (FTR), two companies very similar to Windstream, take advantage of these tax code goodies, more power to them. Those are real gains you got today, big ones, and I think ingenuity should be applauded. If I were a political leader, I would do everything I could to try to close the loophole that let U.S. companies buy other U.S. companies that have incorporated overseas in lower tax regimes in order to lower their tax bills. In the interim, though, I applaud any company making money for its shareholders in this fashion. Why not?

I don't believe that the paper companies like International Paper (IP) should be able to flip its virgin paper mills into master limited partnerships in order for limited partnership shareholders to skip paying taxes. But if it lifts the stock, as I want to ask International Paper later today, then I say game on.

But we have to admit that these are, in the end, all gimmicks -- one off gimmicks that are making the market look stronger than it is. Verizon (VZ) and AT&T (T), two big Dow stocks, benefit from the possibility that they will pull off a Windstream, creating a positive hue over a big part of the market. The idea that cable companies and even utilities can use this tax break also buoyed a big part of the market.

We have to face facts. In the last few weeks, while the vast majority of companies reporting earnings have had impressive numbers, including revenues, which had been an elusive element, something more problematic has occurred that's just not being talked about and it is worrisome, actually worrisome, and is causing me to fret more than I have in a bit.

I am talking about a lot of "end of cycle" talk from analysts who look at only their own cycles but, when taken en masse (like the generalist that I am) has me a little more skeptical of this last set of gains.

Before I talk about which cycles might be turning down, let me emphasize a couple of things so you don't say, "Cramer's become a huge bear." I don't feel like wasting a lot of energy defending my positive posture. I like much of what I see in the market, whether it is the low-interest-rate environment, the relatively tame inflation picture, the good growth of so many companies and the activist and merger pressures that seem to produce wins every single day. Just today, the departure of Darden's (DRI) CEO under pressure for poor performance spurred that stock. Activists successfully took some board seat at Cliffs Natural (CLF), causing that stock to jump. The success of so many drug companies lately -- whether it's good news about an anti-leukemia compound today from Pharmacyclics (PCYC), or the amazing hepatitis cure from Gilead (GILD) that's still powering that stock higher, or the upside surprise from Merck (MRK) that was driven in part by new drug sales -- signals real health in the market, and it's lasting health.

Let's just say in the immortal words of Bob Marley that those are all of the good things we have, but now let's focus on the good things we've lost along the way -- namely some tailwinds, as we call them on Wall Street, that were boosting stocks for months.

First, we are seeing what looks to be the denouement of the housing cycle, something that was so bountiful for so long after the great recession ended. I always like to say that housing punches above its weight because, while it nominally impacts about 10% of the economy, that bleeds into everything from retail to building products to service economy sectors such as banks, lawyers, title people, realtors and the like.

But for the last few months we have seen a decided cooling in every part of the housing cycle, whether it be permits, or builds, or sales of new homes or existing homes. We have seen companies like Owens Corning (OC), Whirlpool (WHR) and Armstrong World (AWI) report dismal numbers. We have seen the mortgage profit lines of the banks decimated. Retailers that cater to homes will no doubt be the next to rollover if they haven't already. Plus, when we got the Case-Schiller numbers this morning they showed a real decline in pricing across the board. We don't want to lose housing, but we are and we have to accept that. Home prices went too high and credit is still hard to get. Fact of life.

Aerospace is a cycle that's been strong for some time, but most recently we have begun to see downgrades of all of the stocks connected with the group and, candidly, with the exception of Honeywell (HON), every single company that has reported in this sector has not been so hot. We wouldn't have to worry all that much if the airline stocks had gone up when they reported monster quarters, but they have all stalled and that's worrisome, too.

This afternoon I listened to CNBC's Phil LeBeau talk about how the fabulous auto cycle, which has been riding high since 2009, may actually be running out of steam and that there may, at last, be too many cars in the system. I was tempted to disagree with him but Ford (F) reported an amazing quarter and it has done nothing, nothing at all. Again, just not a good sign.

I know that the drilling cycle had been very strong and I think it will remain so as long as oil stays elevated, but these stocks have been acting terribly ever since Schlumberger (SLB), the huge oil service company, failed to hit the high end of the range when it reported.

We had a potential for a whole new lending cycle when rates were trending higher, but out of nowhere they have started going down again, making it so banks can't make as much money as we thought they could.

Few cycles have been as powerful as the health-maintenance-billing cycle. These companies have been minting money. But today Aetna (AET) was hammered for what looked to be a pretty strong number. That was totally out of nowhere.

We have been hearing that the truck cycle is picking up after a lull, but yesterday Cummins (CMI) reported a number that on the surface looked good but turned out to be disappointing to those who thought the cycle was improving.

The transports had been going like gangbusters but this morning's shortfall from UPS (UPS) has caused a shiver down the spines of those who thought that commerce was picking up. Tough to feel that way after that quarter, even as I like the stock.

I will say that I believe most of these cycles aren't played out, I think they are just pausing. However, there are too many pausing right now for me to feel comfortable that the gimmicks and one-offs can smooth things over.

In short, we need some of the companies that report soon to show us that these tailwinds haven't all turned into headwinds. If they have, the market is too high. If they are just pausing, then the rally will pause, too, until the numbers get better again.

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