Jim Cramer: Today's Action Plan After the Market Sell-Off

 | Aug 15, 2018 | 3:43 PM EDT
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You get that event. You get that sell-off, the one that breeds fear And I always say, let it come in, let it come to you. Don't reach. It's coming your way. I know that's not what you want to hear on a big down day. You want to know when is the pain going to end. When is the trauma of Turkey going to run through our system. When do we go back up?
That's why I am glad you are reading because I am going to tell you how this sell-off works and why it is not as special as it seems.
First, to some degree this sell-off started with something man-made. The U.S. is having a spat with Turkey and tariffs are flying around all over the place. At the same time Turkey's turmoil can be quelled by some sort of compromise between President Trump and Turkish President Erdogan to release some American citizens held in custody. Then, presumably, the steel and aluminum imports from Turkey, which currently carry twice the tariffs of other countries, could disappear and Turkey will become less of a pariah here and more of an ally. Remember, I said this one is man-made and a man0made dispute can be resolved and when it is, you get a snapback rally that you have to be prepared for even as it seems like an impossibility at this moment.
But today wasn't just about Turkey and I don't' want to dwell on Turkey because of its small size. In fact, Turkey's lire, the epicenter of the country's problems, actually rallied today.
No, there are some other culprits out there today that are freaking people out and we have to discuss them, then put them in context and then have an action plan.
First, let's understand that this sell-off is a carryover from overseas, specifically in China where the Shanghai Composite Index fell 2% and is now down 22% for the year, a true bear market. That market's been hellacious of late because of a slowdown in China's economy.
Last night's decline was exacerbated by weakness at one of the great darlings of China, the video game and social media colossus Tencent (TCEHY) . Back in January this company had a market capitalization of $575 billion. It's now down 17% this year including 6.2% last night because of a weak quarter caused in part by some bizarre, unexplained government intervention in its video game business that that caused a shortfall.
I found this decline disconcerting because it is a reminder of how bad the Chinese Communist Party is at running a stock market. Not only have many investors borrowed money to own stocks but there is also an index fund effect that is pulling down almost all of the favorite Chinese investments that have U.S.-like financials including search engine giant Baidu (BIDU) off 9% for the year and the much loved Alibaba (BABA) , the Amazon (AMZN) of China, which, after a real run is now down 2% for the year.
Bear with me for a second before I get to the gameplan: China's fraught with a slowing economy, nascent inflation caused by a weakening of its own currency and a shroud of secrecy about what's really going on with the government.
The weakness in China spread to Europe and here's where things get a little sticky. At about 4:30 a.m. ET our stock market was looking down a little less than a quarter of a percent, in line with Europe. Then Europe fell out of bed and plummeted precipitously to down about a full percent.
Same thing then happened here. We were completely in sync. We have to ask ourselves, does that make any sense at all? No, but it is what's happened repeatedly for ages and ages. Now, ultimately we disentangled as their markets dropped about a percent and a half, the same as the NASDAQ but much more than the S&P's decline.
Now, behind the scenes is another element of the world's economy that is spooking so many people: the collapse of the commodity complex. Copper's hitting lows. Lumber's way down. The metals complex is awful and now oil is down huge.
The takeaway for most people? The Trump tariffs have slowed world commerce so numbers have to come down.
Final nails in the coffin? Macy's (M) allegedly reported a weaker than expected quarter taking its stock down 14% and Kimberly Clark (KMB) is putting through tissue price increases to make up for inflationary inputs. Takeaway? Little growth, high inflation. Sell sell sell.
Now, I want to put this all in context that the bears are absolutely going to hate.
Let's start with China. The Chinese are digging in their heels, not giving in to President Trump's entreaties for a level playing field. We hear endlessly that President Xi is playing the long game, waiting out President Trump, something he can do because he is not democratically elected. That's true, I have no doubt. But the Chinese stock market is playing the short game. When the communists, who run a command economy, decided to have a stock market for companies to raise capital, I think they may have misjudged how stocks can't be commanded to go lower. This decline is not in the Chinese cards. Plus when the government basically deems a shortfall for Tencent, well, that's a freak-out writ large.
Europe? What can I say? It looks like many of their largest banks have lent in Turkey and now they have to take the hit. Plus Europe sells a lot into China and that's a real link.
But how about us? What's the real linkage here?
Here comes the game plan. First, it's ridiculous that we should be down as much as Europe. Our linkage to Turkey is almost nil, and it's much more a man-made headline risk at this point.
Second, if you listen to as many conference calls as I do you know that one of the real issues this quarter was a decline in gross margins from soaring commodities. Guess what? They are plummeting. Oil coming down? So many companies' profits were crimped by energy, how can this possibly be bad? Third, the flight to quality that all of this turmoil causes has kept interest rates in check. Housing affordability, a big issue here, could gain from the rate and commodity declines because the price of homes and the price of money are up too much.
Macy's? Oh please, it was a real good quarter with some gross margin issues but real growth. I think the stock's a victim of its own success: even after the decline it is still up an astounding 43% because of the fantastic job CEO Jeff Gennette's been doing revitalizing the stores, developing a robust digital strategy all the while fixing the bad balance sheet.
Now, here's the real rub. For months we have watched the Nasdaq go higher based on fabulous earnings. You think it makes sense that the Nasdaq went down on that bill of particulars I laid out? I say not at all. This is the classic series of exogenous events that periodically bring down the high fliers, like the cloud kings, like Amazon like Alphabet (GOOGL) and even Facebook (FB) with a stock that I now think has gotten out of control on the downside.
Should we just go buy everything then? No. The charts are bad and the technicians are freaking out. Lots of stocks are in weak hands, those that don't know what they own.
But if you aren't buying something here, picking up the stocks that we have said over and over again should be bought on something unrelated to their fundamentals, I think you are missing a terrific opportunity. Too bullish?
Maybe not bullish enough.


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