It's the prism, the prism that determines how stocks trade right now. The facts are being bent by the prism you use, your frame of reference and the perception of the majority right now is quite negative.
I want to spend some time explaining why events that would normally be viewed as positive don't come off that way and the confusion about why that it colors pretty much everything.
First let me give you the prevailing zeitgeist that bends the prism's light into a dark, foreboding, specter.
The terminology's a little arcane for most: late cycle, as in we are in the last part of the economic expansion and don't you forget it.
Who determines these things? Some of it is by rote. When the Fed starts tightening the economy can handle it, especially this time, because rates were so low to being with 8 quarter points ago.
But as rates go higher and higher if becomes obvious that the economy has to sputter. It's been a long time since it has sputtered but it is clearly doing so and even Fed Chairman Jay Powell admitted that he is concerned that it might be slowing. As recently as six weeks ago he was singing a different tune.
Adding fuel to the narrative: Europe and Asia are slowing, the former perhaps because of Brexit, because of instability in the Italian government and a slowdown from a lack of demand coming from China.
The fallout from China is obvious. The economic reports from the PRC, while strong by the standards of other countries are much weaker than the Chinese authorities would like. Why? Because of the tariffs. So many of our companies are working diligently to move manufacturing out of China, or to "mitigate" as they call it, that the panic is palpable. It's not all that hard to judge, given there is a thing called the Baltic Freight Index which shows worldwide shipping data and it's been plummeting like a stone.
Now, periodically we hear that one of the two major chords that are causing this market to be bearish might go away. Today we were doing our usual midday swoon when we got word from press reports that there might be a truce with China over the implementation of the 25% tariffs in January, a big jump from 10%.
That's big. It would amount to a belief that the damage is reversible. I am of the opinion that the trade issue is just the tip of a much larger iceberg, which is to starve the Chinese from using our money to fund their ambitions to topple our worldwide hegemony. In that sense you better believe that 25% isn't enough. You need to shut down commerce entirely if you want to get the regime change that our government seems to want, at least according to the Pence Doctrine, outlined in his amazing containment speech at the Hudson Institute a little more than a month ago. So any truce might be a sucker's bet.
The prism can also be bent toward the light by any talk that Jay Powell may just put through one rate hike in December and then wait until its prudent to put through another. So far that, too, has been a sucker's bet. If you believe in it you have lost a lot of money. That said, the change in position certainly seems possible if you listened to Powell last night. More on that latter.
But let's go presume that both rays of hope don't pan out. Let's presume that neither President Trump nor Jay Powell worries about the end of the cycle because Trump cares more about starving China rather than let it achieve great power status and Powell cares more about inflation.
How does the prism play out?
Okay, let's start with the earnings this morning from Walmart (WMT) . I didn't look at the stock when they were reported. I looked at the numbers. They were excellent. Actually every line was excellent. It was staggering to behold what they are doing in Bentonville.
Initially the stock was up, just like the stock of Home Depot (HD) or the stock of Macy's (M) when they reported. But I knew that was a sucker's play. How? Because of the late cycle prism. I heard instantly not that anything was wrong with Walmart. Just the opposite, everything was good, so good, that it can't ever be better because we are at the end of the cycle. It becomes almost circular reasoning. The stock can't go higher because it is the end of the cycle and it's the end of the cycle because the stock's down. That's exactly what happened.
I have read the Macy's quarterly conference over multiple times. There was nothing wrong with it. But today J.C. Penney (JCP) reported a miserable numbers and the end of cycle maniacs have decided Penney's finished and its competitors will be banged down by all of its excess merchandise. Meanwhile the merchandise makers, Ralph Lauren (RL) , VF Corp (VFC) , PVH (PVH) , were obliterated.
We see this all of the time with the housing sector. Here's a group that has been on the business end of the Fed's howitzers for some time. The homebuilders themselves have been blasted to smithereens. But in a bear market its never enough. Even though it takes a true ostrich to not know that housing has slowed, these stocks just got laid to waste when the CEO of homebuilding giant KB Home (KBH) said there has been a pause in housing in the last five or six weeks resulting in a year over year decline in orders year to date. That just crushed the group:the stock of KB Home fell 17%, Toll (TOL) fell 6% and Lennar (LEN) dropped 5%. That's' the end of cycle talking. It was so brutal that it pulled down a quintessential housing play, namely the stock of Home Depot (HD) , which, in bad times, is regarded not as a retailer but as a company whose fortunes rise or fall with home sales. That makes Home Depot a housing play that therefore its quarter was the last good quarter.
It doesn't matter what company says it. Do you know that the stock of Cisco (CSCO) , after reporting the best quarter I have seen literally since the 1990s, actually went from being up a dollar to being flat after the press release came out.
Now as it happens, the CEO of Cisco, Chuck Robbins, came on "Mad Money" and discussed how many of the positive line items are accelerating. That was hard for the bears to refute. So it went higher. But it was clearly an outlier.
Now this end of cycle logic raises its head everywhere. Apple's (AAPL) stock has been pummeled because it is the end of the telco cycle coinciding with a coming recession that will make it too expensive to buy new phones. That's why so many believe Apple is no longer disclosing unit sales. I think that Apple's got so much service revenue going for it because of its huge installed base that there's not nearly as much cyclicality involved here. But, obviously other than on days like today, where the stock ignited in a rare rally, it's considered ineluctable.
Remember, if Powell reverses and says it's not in plan to raise rates next year unless the data determines it's red hot, and if President Trump gets a deal he wanted then the end of cycle proponents, especially the hedge funds who come on our air and always talk about how the economic expansion is in the late innings, might have to change course and the market will rocket higher.
Otherwise though, rallies have to be sold because the bears have the microphone and they just won't let go.
(Apple and Cisco are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AAPL or CSCO? Learn more now.)
