Reading the market's reaction to the Fed
Investors are punishing and rewarding stocks, sometimes without much reasoning other than the central bank's decision not to taper.
Sometimes the market has no idea what to do. This is one of those times.
First, we have decided that the Federal Reserve is all-powerful and because it got rates down to 2.75% on the 10-year Treasury note, we should sell stocks that do well in a recession, especially if they delivered just inline earnings.
So consumer packaged goods company ConAgra (CAG), which reported pretty much exactly what it said it would, gets clobbered, going down another dollar on top of the two bucks it lost the day of the preannouncement. Why not? Who needs an underperforming food company when the Fed just greenlighted an economic expansion. Who needs Slim Jims when we can buy stocks of companies that make cabinets and washing machines? Same with General Mills (GIS). This fantastic company reported an inline number and gave inline guidance, and it has been eviscerated. Who needs Cheerios when we can buy railroad stocks?
What were we thinking when the S&P 500 ($INX) futures took up the slower growing PepsiCo (PEP) on a day when the Fed decided it wasn't going to cut back its bond buying. Silly us, ring the register on PepsiCo and go buy the stock of a shirt company, which is how PepsiCo can drop $1.40.
McDonald's (MCD) gives you a nice 5% dividend boost, bringing the yield up to 3.3%. But who needs a fast-food-restaurant stock when we can buy a once-lagging real estate investment trust company like Federal Realty (FRT), which I had on Mad Money Wednesday night?
Ah, but wait a second. As much as the Fed has decided to fix things so that all is better domestically, what do we do with the stocks of companies we know aren't having good quarters but could be saved by the Fed next quartet? Will the market look through a bad quarter to get to one that will be boosted by a non-taper?
I don't think so, which is why the market is selling down the stocks of the homebuilders that it took up Wednesday. We know from the announcement of sales of previously owned homes Thursday that while the numbers were at a six-year high, the commentary from the National Association of Realtors was incredibly downbeat. Lawrence Yun, chief economist of the association, called it "the last hurrah" and said that the market may be experiencing a "temporary peak" as rising rates and declining affordability bring that number down in the future. Hardly reassuring.
Meanwhile, if the Fed is making things easy again, that's terrific for traveling and spending, right? Then why did the market take the Morgan Stanley downgrade of Disney (DIS) so hard, whacking that stock for a $1.35 loss?
Plus, it's hard as all get out to figure out what to do with the financials. Lots of banks and insurers were going up because they do better in a rising rate environment. But now we have a falling rate environment, so we have to sell what we liked so much because of the Fed's actions. So the regional banks all go down the drain and big insurers like Prudential (PRU) or Lincoln National (LNC) (which I talked about Wednesday night as one of the best performers in the market this year) get crushed. But wait a second -- Travelers (TRV) catches an upgrade and flies up a dollar because its quarter's terrific. Who can keep up with this insanity?
It's helpful in moments like this to remind people that you want to buy companies that aren't affected by this vortex, companies like the big industrial enterprises that the Fed does not control with its tapering. You want to buy stocks like United Technologies (UTX), 3M (MMM) and Emerson Electric (EMR), which are levered to a turn in Europe and newfound strength in China. Or stocks like Boeing (BA) and Honeywell (HON), which are levered to aerospace, which, again, has nothing to do with the Fed. Only buy the Fed-related stocks if you are certain they will blow away numbers here and now because no, the market will not look through earnings. It will sell off disappointers, as it always does.
In the end, accept that when the market's truly surprised by an act of the Fed, many people reverse field, many people make mistakes and many people have no idea, but they take action anyway.
Relax, take a breath and recognize that if you knew a company was doing poorly now it won't be saved by the Fed when it reports. After Wednesday's big run, they are sells.
But the ones that are doing well? If they are down because of this silly rotation, those are the ones to buy.
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 and is long HON.
More from TheStreet.com
The American consumer ain't what she used to be. May she RIP. JMHO
The taper will come. Hopefully sooner than later. As I gaze at the indices, pretty much all of the gains on Wednesday have been giving back yesterday and today. Equities have moved as far as they can. A double top indeed.
Will the Republicans have the balls and hijack the budget and the debt ceiling increase? I dearly hope so. America needs to be forced to do the right thing.
Obama's veto power will be the one pounding the nails into America's coffin.
Scary to be long in this market and Halloween is just around the corner too.
Without the $1 Trillion in annual Federal Deficits, without the $1 Trillion in annual Funny Money infusion, without the multiplier effects of both of those, without any real plans to fix the underlying structural economic problems in the US, the US is screwed.
I would argue that approximately $3 Trillion of the annual GDP would not be there if it wasn't for the aforementioned.
Did we avoid another "depression"? Yes.
Are we setting America up for a more catastrophic day of reckoning? God help us all.
Warren Buffet states stocks are fairly valued, what else do anyone expect him to say. He's defending his position. If he was short the overall Markets, he would say just the opposite. I say it's safe to safe we are seeing more of what we expect, major short squeezes. We know it's dumb to short stocks when the Global Feds are printing to infinity but fools just keep on doing it and losing their shirt, Literally.
Apple is $500 per share. A 100 shares, that's 50G.
Priceline is $1,000 per share. A 100 shares, that 100G.
Netflix is over $300, a 100 shares, that 30G.
Tesla is now over $170, a 100 shares, that 17G
Linkedln around $240, a 100 shares, that 24G
So if you held all 5 positions, 100 shares a piece, that's $221,000. That's not exactly chump change for a high risk position. Maybe for some it is.
Cramer -- you are missing the whole point of the Fed's decision not to taper it's QE3.
The Fed is pumping almost $1 trillion dollars a year into the US economy in a way that only makes the super rich richer and does nothing to address the core problem of the US economy. If you throw out the $4 trillion dollars they add to the GDP for the money you get by living somewhere else for free and renting out your home for top dollar, the $1.5 trillion dollar add to the GDP for the new not even sure what to call it add to the GDP where they value the invention of movies at like triple their box office sales basically a free add to the GDP to keep it from going negative. Take out all of these made up adds to the GDP and we are running a GDP of about $8 trillion so a $1 trillion add from the Fed is a huge increase over 10 percent a year.
Yet the economy is still dead.
The US economy is stuck in a Death Spiral of Lost Jobs and an ever weaker and weaker economy. We are still losing jobs and income at a fast rate folks. Most job cuts are people making more than $80,000 a year and most job hires are people making $7.25 for 29 hours a week or $10K a year.
THE ECONOMY IS DEAD CRAMER AND NOTHING THE FED IS DOING IS HELPING!!!!!!
Next Quarter, next month....??
Seems many investors and traders are only guessing at "next week" and some only a couple days out.
That is absolutely one of the worst ways to invest....You encourage your own instability.
No, there is nothing wrong with buying only a couple or few shares of any stock..
It's done all the time in 401Ks and IRAs...
It just called allocations.
Or an investor can buy what they can afford for various reasons.
To me diversity is the key, buy and hold, buy and trade, speculation or risk/reward, and dividend payers....And stocks in different Sectors.
There are many ways to play the game.
Copyright © 2014 Microsoft. All rights reserved.
Jeremy Siegel is still optimistic about stocks, saying the US economy is the best in the world. Still, he says, we're getting closer to fair values.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.