You can't wait. You have to buy ahead of the end of bad news. That's the theme today and I agree with it. The best example?
The semiconductor stocks.
We are seeing a remarkable reversal in a leadership group, a group that led us down. It has the ability to lead us up but it is going to be hard for lots of people to swallow.
The linchpin of the entire move is the stock of Micron (MU) which started to go up this week on two upgrades, one yesterday and one today, both with a common theme: you cannot wait for the price of their principal product to bottom to buy the stock of this huge commodity chip maker. You have to get in ahead.
Now this is a perfect example of how the stock market does work. It tends to look out six months. It also tends to overlook the last bad quarter. That's what the buyers of Micron are doing with the stock up from $29 to $35, again propelled by the upgrades.
I like the analyst calls, especially because Micron's stock is down from $63 where it stood just eight months ago. The stock trades at just 4 times earnings which makes it the cheapest equity in the entire S&P.
There's only one problem: will buyers really look through the next quarter when it is reported on March 20th? Will they accept the fact that there will be severe number cuts when they report? Or will they skedaddle because of the cuts and scuttle the entire rally in its tracks. Is this move ephemeral or is it just a trade?
Let me tell you how this is both emblematic, allegorical and metaphorical for the moment.
The reasons why Micron's stock has been shelled? Supply and demand. Or to be more accurate a ton of supply and a lack of demand. You have to think of Micron as a building block of the new economy, the same way chemicals and papers used to be the way you calibrated the strength of business. Those two staid commodities still matter aplenty, and, not coincidentally, they are still experiencing downturns, but Micron is far more important to measure the new economy and the new economy has been in the doldrums not long before Fed Chief Jay Powell told the world the economy was red hot and needed to be tamed by three or four rate hikes, preferably the latter. Those comments hastened a further selloff and cratered all of tech with Micron being the hardest hit because of its commodity like nature and the ease with which new plants could be built by Asian competitors.
It gets worse. In the complicated world that we find ourselves in, just when Powell was talking about the economic pot boiling over, Micron's business starting to be crimped by the trade war and the fallout of slower growth out of China, something we are all familiar with now.
So you get the allegory? The economy peaked just when too much supply came on and the Fed tightened the screws while China rolled over. Micron was caught up in every aspect of the macro world and pricing collapsed. That caused Micron to slash the forecast and to predict that the inventory was not lean, was not in balance, but went from tight to glut.
What's going on now? Aren't the analysts jumping the gun? Yes, if you talk about the next quarter which we know will be bad, but no if you think that the trade war will simmer down and Jay Powell is a man of his word when he doesn't just look at employment but he looks at building blocks like DRAMs and flash memory, the other product Micron makes which was thought to be mortally wounded but can, also, make a comeback if the world's economy can restart. But, no you aren't gun jumping if you listen to what Sanjay Mehrotra, the CEO of Micron, said to CNBC's own Jon Fortt at the big consumer electronics show in Las Vegas this morning, which is that the inventory correction is going through its natural course and demand is picking up as all devices, including the slower growing cellphones, need more memory and storage, the twin bailiwicks of Micron. Given that Micron is so visible it has the capacity to turn around this entire group, and it can regain its luster as a leader to the upside.
First, it's igniting the cohort. This morning Skyworks Solutions (SWKS) preannounced a shortfall and its stock is rallying, again part and parcel with the idea that you can't wait for a turn. We have an explosive move in Broadcom (AVGO) , a big cellphone chip maker among other markets.
Then there is the move in Nvdia (NVDA) . This stock has been cut in half because of an inventory glut of gaming/cryptoid cards, one of its business lines that swelled in large part because of the Bitcoin craze. Remember, Nvidia couldn't figure out whether people were using its cards for gaming or for mining. It turns out that there was much more ephemeral demand for crypto currencies and much less for the secular growth gaming arena. That inventory, too, is being worked off so that stock is coming back. Curiously yesterday an analyst put out a note that said you would be gun jumping a bad quarter if you buy now. That caused a one day glitch and now the buyers are back betting, again, that you can't wait for an all clear sign from Jen-Hsun Huang, the redoubtable and visionary CEO of that treasure of a company. I think the buyers are right because the company has just cut price for its new Turing line of chips and I think adoption will be far more rapid than most realize. Remember, Nvidia never lost its hold on autonomous driving and machine learning and the data center; it's just been obscured by the crypto collapse.
Then there is the stock of Lam Research (LRCX) , which makes the equipment needed to create the chips that are in glut mode. That stock ALWAYS bottoms well ahead of when it says that there is customer weakness. I don't expect this quarter to be anything to write home about but remember we aren't writing home, we are buying stocks you can't wait for the all clear.
Now, as I said, Micron is metaphorical. It is not alone. I have been saying that the housing stocks have been bottoming ever since Powell kyboshed whole swaths of the economy. This morning Lennar (LEN) , the largest homebuilder, reported a shortfall but on its conference call, chairman Stuart Miller said that since the peak in interest rates traffic has improved. I can't stress how important this is to the overarching part of the economy I have been so worried about it given that the 10% of the economy that is housing punches well above its weight.
Now I am sure there are people who are saying, wait a second, Jimbo, we just had a fabulous employment number. I have no qualm with that, it is one of the reasons I favored the last rate hike. But given the collapse in so many different parts of the economy beginning in September it's not such a bad thing to wait to see if the hikes have done their job. My thinking is they have, they have cooled things just enough to bet that the Fed's on hold so it is worth buying stocks ahead of when the businesses they are connected with have bottomed and they are off to the races without you.