The trough. The oldest, ugliest place to be. The beginning of the end? Or the start of something new? The trough's a super-dangerous place, because it's way too dark to actually to see if we really are at a bottom. Maybe some stocks of some companies escape the trough, while others find themselves buried alive after a fabulous run.
That's exactly where we are right now, in the third day of this rotation out of the highest growth companies, the Cramer Covid-19 Index, and into the big uglies, the industrials, travel, leisure and financial stocks that have been eschewed for ages but are now suddenly embraced. What's the real danger here? Because if you don't adjust, you ignore these violent moves at your own peril.
First, let's define the trough. It's when we go from the end of free-fall into recovery mode. You can't jump the gun. That can be deadly. Many have tried, as we have had a series of three-day rotations into the Caterpillars (CAT) and the Boeings (BA) and then we get failure, and they go right back into the trough.
What's at the end of free-fall? I am talking about things like work at home (think Zoom ZM) and the play at home (think Take-Two Interactive (TTWO) ) and the eat at home (that's McCormick (TTWO) ) and protecting your work from being hacked (which is pretty much everyone including Crowdstrike (CRWD) , Palo Alto (MCK) , Okta (OKTA) , and Sailpoint (SAIL) . Of course there's the big five, too: Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) , Alphabet (GOOGL) and Microsoft (MSFT) . Because of strange confluences, all do better in a pandemic than they might otherwise. These stocks have monopolized the new high list and in many cases they have valuations only seen during the 1999-2000 Nasdaq.
Now, though, there are plenty of signs that we are leaving the trough, at least for the publicly traded companies that have been stuck in there. There's a big leap of faith here because there's 16.4 million people unemployed. But that's down from 24 million in April. Remember, we are talking stocks, not people. But that's way too many people on the rolls. That said, the trend line's clear. There's a tremendous number of people who can't pay their rent. But, increasingly, commercial rents are being paid. Again, we are not trading futures about your ability to pay rent. We are owning the stocks of companies that are now on more solid footing.
You cannot wait until we are full of mirth about these numbers. That said, we all see that the numbers for the two lines of Covid-19, cases and deaths, are getting better. The rate of cases is declining. The mortality rates are plummeting on an absolute level. The Russians are claiming they have a vaccine. We don't trust them. But we know that vaccines beckon. Again, if you are in pro sports, where the money is big, you cannot wait for the vaccine. The rest of us mortals, though, use our meager social distancing and mask weapons against a powerful opponent. It didn't take the dropping of two atomic bombs to know we were going to win the war, but we did know that the 6th Army, Pop's group, would be slaughtered in its landing before the capitulation. You don't want to be part of the proverbial sixth.
So, what makes me so sure that this is the real trough and the cyclicals, industrials, and banks lead us out, not the Covid stocks? Let me give you the 12 tells from the trough, so you know why I think it can be the real deal.
No. 1: gold is plummeting. As long as gold was going higher, you had to keep depression Armageddon on the table. It may have been taken off today.
Two, interest rates are going higher. So many smart alecks come on shows and talk about the certainty of negative yields. They are in scramble mode now. Higher rates, by the way, are bad news for hold buyers who like to borrow money to purchase the precious metal.
Three, oil has been making a stand in the low $40s. That's where many Permian producers, especially the underleveraged ones, can survive, an important gauge of our nation's health, and one that shows increasing demand.
Four: there is travel demand. Royal Caribbean (RCL) reported that there are as many reservations for next year's cruises as there usually is about this time. That's monumental given that cruise ships were epicenters of Covid-19 infestation. Airlines are starting to see a pick up in traffic, admittedly off a very low base. You can't wait until they are half-filled though. Marriott (MAR) says the bottom has been put in.
Five: The biggest shopping center company, Federal Realty (FRT) , which is on "Mad Money" Tuesday night, and the biggest shopping mall, Simon Properties (SPG) , have seen increasing rent payments per month after a staggering period of deferrals or defaults.
Six: the autos are back. Today PPG Industries (PPG) preannounced a sharply better-than-expected number because of paint for high-end cars. Anything that's good for cars is also good for Dupont (DD) , an Action Alerts PLUS name that I will be talking about on our Thursday club call.
Seven: Boeing reported some hideous, horrible order numbers, and the stock went up, which is exactly what a bottom looks like. That's also extremely bullish for Honeywell (HON) and Raytheon (RTX) , two huge Boeing suppliers.
Eight: Speaking of Honeywell, it caught a pretty ugly downgrade and rallied, anyway. We also caught a note about 3M (MMM) saying that if the Democrats sweep, then it could be in real trouble over groundwater pollution. There was a time when this piece might have knocked this thing on its butt. Instead the stock rallied big.
Nine: Caterpillar's last quarter was disappointing, and I couldn't think of a single reason to buy the stock. But others look at this one as the sainted industrial, the one you have to reach for and hold for its $10 in earnings power. That's exactly what's happening.
Ten: JPMorgan (JPM) has escalating criticized loans. Wells Fargo is considered on the ropes. People are sick own owning Bank of America (BAC) . Goldman Sachs (GS) has been below book value. Suddenly this group has come alive, which amounts to a prediction that the bad loans might be running their course.
Eleven: Nike (NKE) is one of the best bellwethers out there. We heard from Footlocker (FL) Monday that sales are strong. Nike matters, because the apparel group is huge and has been struggling. Perhaps Nike's back.
Now, here's the huge question, the one I have punted on because I don't believe you have to choose: Is there enough money around to continue to power the big technology stocks higher, even as the work-at-home and stay-at-home concept may be nothing more than that a year from now? I think that all depends on a vaccine and, aside from Russia, no one is sure they have it.
I play with a barbell, the recovery stocks paired with the slowdown stocks, but I have recommended to club members to lighten up on the Cramer Covid-19 names and buy a lot of Honeywell and DuPont. It's tough to part with the stocks that have had some of the greatest gains of my lifetime, but part you must, even if it means you have to pay the taxman. I know I have been greedy with a whole host of Covid stocks. Greed is unbecoming and, more important, these stocks may be stuck in the trough, just at the inflection point of the recovery.