Don't buy stocks based just on the happy macro tale

The micro story hasn't caught up to the macro one yet. Take a look at these 2 companies for how the facts don't always fit with the story.

By Jim Cramer Jul 11, 2013 9:24AM

thestreet logoStock market report (© ULTRA.F/Digital Vision/Getty Images)Sure, it always feels great for the bulls when the futures are ripping. You get all of that juice from overseas. People are feeling that Fed chief Ben Bernanke didn't mean what he said. The dollar is going down, too, which even helps commodities. So let's go buy stocks!


There's only one problem. The travails of individual companies, in dealing with this new environment, are about to come on display -- and the facts, often sadly, do not fit with the story. The stocks that are being swept up by the futures -- the stocks that we might want to buy because of today's snapshot of the dollar, the 10-year U.S. Treasury and the price of oil -- may not fit the patterns people are trying to catch. In fact, they might be performing in the opposite manner from what you would expect.


Take two different companies in two different industries that have had the misfortune to report during periods when the snapshot said, "Buy, buy, buy." I'm talking about Paychex (PAYX) and Nabors Industries (NBR).

 

Paychex is a terrific payroll-processing company that grows earnings in four ways (TheStreet). First, when more jobs get created, there are more checks to be processed. Second, when more companies get created, there are more company payroll accounts to be processed. Third, the company profits when more products are added to those who take the payroll processing, like 401k processing and advice for tax law changes.


Fourth, and perhaps most important: the float. How much can Paychex make on the $4 billion or so it has to invest between the time it gets the money and the time it delivers the checks? That's the float, and it is a bonanza for companies like Paychex -- unless, that is, interest rates are so low that they can barely make much money at all off that float, meaning they make pretty much what you make right now in your checking account.


Paychex is the perfect microcosm for this moment when it comes to the Fed. It's a Catch-22 microcosm, because -- as has been made clear by Wednesday's minutes from the last Federal Open Market Committee meeting -- Ben Bernanke isn't going to raise interest rates through a slowdown in bond-buying until there is more hiring and more business formation.


So think about it: Paychex, right now, isn't getting enough new clients because there's been such horrid business formation and such limited hiring. At the same time, it can't make the big money off the float that investors want. So it has to rely on the third point, ancillary fee work, in order to grow earnings -- and that's not growing fast enough.


So what happened when Paychex reported? All of those people who saw interest rates move up figured instantly that the company was already investing the float and getting a much higher rate than it had in the prior quarter. They were looking for a big gain from the float-income line. There were others who were looking for some job growth because, well, didn't we just hear from the Fed that it might start tapering stimulus because job growth is coming back?


It turns out, though, that the Paychex facts just didn't fit the better-employment/higher-float income story. It was just the opposite, in fact. Client growth was almost nil. The yield curve hadn't changed so much that Paychex could take advantage of the higher rates, so float income was pretty much unchanged from what it was supposed to be. No upside surprise in this market, of course, means nothing less than a downside surprise, and the stock was hammered.


Now consider Nabors. On Wednesday, oil broke out above $105 per barrel. Nobody really knows what the heck is going on with oil. Could the strife in Egypt close the Suez Canal, causing traders to freak out and bid the price up in anticipation of that event? Could the drawdown in inventories in the U.S. be so great that we aren't pumping enough? Yet U.S. pumping is now at levels not seen since 1992, and we are clearly on a path to return to the levels of oil we produced in the 1980s. At the same time, we are more efficient in our use of oil, which means we will import less and less each year.

Is this oil move a technical breakout? Is it the kind of breakout that makes people think prices will at last go back to where it they been right before the worldwide economic collapse? Is China about to stimulate? Is oil now just the new commodity coin of the realm? If so, this would mean that big pension and hedge fund managers like to use oil as their chit in the asset allocation of commodities, now that copper, aluminum, iron and the grains are all in glut. Is that the deal, as our friend Dan Dicker has been asserting here?


All I know is that, when crude crossed above $100 and then broke through $105, it seemed like a darned good idea to get long an oil-services company, didn't it? You know that, if orders were being cancelled, those cancellations would get canceled. You know that some oil companies have to be deciding their oil budgets, and they realize if they just drill a little more now, they can pay down debt later.


So the Market Vectors Oil Services ETF (OIH) gets bid up, and then folks snap up individual stocks in the group are that haven't been moving as quickly as others, as the race is on to play the oil breakout.


Then someone invites the Nabors skunk to the party -- Nabors, the giant land driller that has simply disappointed time after time after time. Nabors, which has a kind of "if there is a will to do poorly, it will find a way to do poorly" quality -- and this company sure has that will.


Then Nabors issues a pre-earnings announcement, and it's a real stinker because of the decline in natural gas drilling, owing to the well-known glut. When that happens, all of the air goes right out of the group, and it underperforms the averages despite the surge in oil. It's a total pick-off, to use the baseball analogy, as the whole oil complex had been leaning the wrong way, with traders in disbelief that Nabors could screw up such a fabulous trade.


But don't worry. Not all is lost. The hope-hype game springs eternal. Paychex is right back to where it was before it reported, in part because it had a good dividend yield and it looks like Ben Bernanke has put a little pep into the bond-yield-equivalent game. If he isn't taking rates up that much, and we still get a good tax deal on dividends, then why not take the 3.5% Paychex is offering? Why not wait until the float income does go up? It shouldn't be long now, because rates haven't gone back down -- they just stopped going up. Wait for the job growth to kick in because, alas, won't that happen someday?


Who knows. Maybe even Nabors can get it right -- although I think that it's the oils, not the services stocks, that represent the best way to play a rise in oil.


That all brings us to where we are now. We have seen a series of bank downgrades in the past few days on the eve of big-bank earnings. I get that. That's the Paychex problem: There isn't enough job growth, plus not enough certificate-deposit repricing -- that's the float -- in order to offset a prospective decline in demand because of higher prices for money. So the very stocks people want to play for the moment -- the banks, the ones that have done so well -- might turn out, in the short-term, like Friday, to be the wrong ones.


Still, never fear: The Paychex-like rebound could be here, at least sooner than you think, so it probably isn't worth selling the banks. But I fear there will be no more bank gain without some pain first -- and, if you own the real wrong ones, like Nabors, there'll just be pain and nothing more.

 

Cramer 


Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust has no positions in stocks mentioned.

 


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10Comments
Jul 11, 2013 12:02PM
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Apparently... only the 1% are counted now as "we" Americans... and "we" Americans are no longer worried about Bernanke ending the Crack Kool Aid Funding and restoring normal economy. Pity. The "other" Americans don't see jobs that pay more than $8/hour, employers who aren't corrupt bastards, and business platform after business platform stuffed full of administrators, paper and button pushers and financial manipulators. "We" don't do anything in America any longer, except take fiat money from the markets to fund our corruption. Us "other" Americans know we have no President, no Congress, no Supreme Court representation or protection... we're just out here to be moved like cattle in indenture to eventually pay dearly for this folly. Remember America... Bernanke specifically said: Until I see more job creation, I will keep spewing QE. Anyone with a brain knows he REALLY said: As long as we keep blockading jobs and suppressing career skills, we can do this thing indefinitely. Anybody notice that we didn't hear CRAP from Obama about the course, which is NOT lifting the Middle Class, is NOT recovering, is NOT creating economy. It's creating BUST. Eat the rich, they got the REAL food, we got GMO'd.  
Jul 11, 2013 10:03AM
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So many folks trust this Institution and I believe folks will be sadly disappointed.  How can one be so gullible to be accepting this confidence game.  So many trillions moving on Bernanke's gyrations day to day week to week. I don't believe folks understand the transformation going on in the USA as well as the world.  This is all unchartered territory except of course for 2000 when we all waited at the starting line for the FED speak and we saw how that turned out no didn't we?  There are some very very revolutionary economic changes going on right now and if you want to have any money left you had better start thinking of what is going on.  We have had zero wage pressure yet food and fuel are increasing regularly.  We all know the pressure to align the US economy with the Asian rim economies is in progress.  No International economist suggests the American lifestyle will not be anything but substantially lower when this is done.  I have heard estimates that we may be half way through the arbitrage.  I am inclined to think 1/3.  And this would be a DOW of 5000.   The folks with investments must also conform to this new level or "value" and how we are to be "pushed" there is still the mystery.  There is a very "secret" game in play and the smart folks are already thinking and planning.  Ask yourself how and why are we allowing oursleves to assume 20 trillion in debt?  This is totally amazingly ridiculously foolish by any responsible standard yet folks are applying the same investment standard as they did in 2000 here today.   To be comfortable following this crowd may in time look totally foolish. Does this not seem totally absurd?  Good Luck.  JMHO
Jul 11, 2013 9:38AM
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So based on the minutes of the June meeting, it seems there's starting to be some real divisions within the Federal Reserve regarding QE.  I decided to go back and look at their previous economic forecasts, starting in 2009.  Needless to say, their estimates for GDP growth and unemployment have been WAY OFF for awhile now.

At the January 2009 meeting, Bernanke and the boys predicted  -0.9% GDP growth for 2009 (it was actually -3.1%), 2.9% GDP growth for 2010 (it was actually 2.4%) and 4.4% GDP growth for 2011 (it was actually 1.8%).  They predicted an 8.7% UE rate for 2009 (that year ended with 9.9% UE), 8.1% UE rate for 2010 (that year ended with 9.3% UE) and 7.1% UE rate for 2011 (that year ended with 8.5%).

At the January 2010 meeting, Bernanke and the boys predicted 3.1% GDP growth for 2010 (actually 2.4%), 3.9% GDP growth for 2011 (actually 1.8%) and 4% GDP growth for 2012 (actually 2.2%).  They predicted a 9.6% UE rate for 2010 (actually 9.3%), 8.3% UE rate for 2011 (actually 8.5%) and 7% UE rate for 2012 (actually 7.8%).

At the January 2011 meeting, Bernanke and the boys predicted 3.6% GDP growth for 2011 (actually 1.8%), 4% GDP growth for 2012 (actually 2.2%) and 4.2% GDP growth for 2013 (actually 1.8% so far in Q1).  They predicted an 8.9% UE rate for 2011 (actually 8.5%), 7.9% UE rate for 2012 (actually 7.8%) and 7% UE rate for 2013 (actually 7.6% so far).

At the January 2012 meeting, Bernanke and the boys predicted 2.5% GDP growth in 2012 (actually 2.2%), 3% GDP growth in 2013 (actually 1.8% so far in Q1) and 3.7% GDP growth in 2014.  They predicted an 8.4% UE rate for 2012 (actually 7.8%), 7.7% UE rate for 2013 (actually 7.6% so far) and 7.1% UE rate in 2014.

Now looking toward the future, let's see how far off they'll be again.  At the March 2013 meeting, Bernanke and the boys predicted 2.6% GDP growth for 2013, 3.2% GDP growth for 2014 and 3.3% GDP growth for 2015.  They predicted a 7.4% UE rate for 2013, 6.9% UE rate for 2014 and 6.2% rate for 2015.



Jul 11, 2013 2:44PM
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  Tog, Your EGO is looking good today, hope it keeps it up. My SLW is ok as well. Can't decide to write a weekly $20.50 call for Friday, be like a 1.25% weekly dividend, but hate to get called out the way these metals stocks have been opening in the mornings. Might not have a chance to get back in. Maybe just hang on. Good investing!
Jul 11, 2013 2:32PM
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Well at least you guys are about something that pertains to the Markets or Economy..

But I'm tired, had a great day golfing..

And having a great day in the Markets..

So I'm going to take a nap, maybe rest up and go to a Money place tonight, hit that 12.

Jul 11, 2013 11:23AM
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And still no answers as to which companies received "charitable donations" from cramer's company !!!


I wonder why !!
Jul 11, 2013 11:22AM
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Yet again cramer giving us news on something that has already happened and telling us why ?

Gee thanks ..... I guess that's why your action alerts performs so poorly as you are only wise after the fact ....is that why you don't post results ?
Jul 11, 2013 9:56AM
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The real estate recession destroyed $40 trillion in asset values. Central banks have printed $20 trillion but it's mostly sitting in bank vaults and money market accounts. Banks will take 2-3 more years to satisfy asset to capital ratios and start paying depositors and investors returns. Equities have been run up by Wall Street hedge funds and traders with little or no retail involvement.  The worlds economies are still on sugar water and it's not going to end with real budget cuts still looming. The cost of gold production is going up and so will the price of gold.
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