(Real Money) - Welcome to the most treacherous of months. Welcome to September.
Now, September is just a collection of days, just like any other month. There's no evil magic to it. That said, get used to days like this, because I believe there will be far more of them than we have come to expect since the bottom back in March of 2020.
Why am I so concerned about the weeks ahead, other than the self-fulfilling prophecy that the month has led to disappointment far more often than others and it's been ages since we had a serious decline?
I don't want to waste your time. The reasons I want you to be ready for volatility -- a Wall Street code word for a selloff -- are myriad and I want to tick them down right now.
First, I am a huge believer that the stock market is driven not just by the Fed, although I know most in the media think the Fed is all that matters, but about how companies are doing. Earnings, sales, the pedestrian day-to-day stuff is what I care about, because it's what drives the vast majority of individual moves.
The numbers, the reports, have been phenomenal for ages. We have been spoiled by earnings surprises seemingly forever, positive earnings surprises.
Today, however, we have seen the nasty side of earnings surprises, the downside, and we're not used to it. Two venerable companies, Sherwin-Williams (SHW) and PulteGroup (PHM) told of disappointing quarters owning to supply chain problems and inflationary raw material costs. These comments come on top of Tuesday's announcement from PPG (PPG) , the coatings company, which surprised a second time with a predicted shortfall, very similar to last quarter's disappointment on raw costs and supply disruptions. We are also seeing a raw cost that we haven't seen in a very long time -- the price of natural gas. We have gotten used to seeing natural gas hanging around $3. Now it's more like $5 and that's just too high for a fuel that dominates our power supply and is a basic building block for so many industries.
The good news is that none of these companies' stocks got crushed. That's because demand is not the problem. It remains robust. So business is good.
The bad news is that these problems aren't going away and they seemed to be ingrained. No wonder the Federal Reserve's Beige Book, the board's assemblage of reports, showed continued elevated inflation. It's true.
That brings us to problem No. 2, which is the Fed. Again, the be-all and end-all for many, the Fed is betting on inflation being transitory. That's keeping it from ending bond buying to keep rates low, let alone raising rates. The intractable nature of these announcements like the ones we saw with PulteGroup and PPG, though, the supply chain and raw cost refrain, just can't be put to rest. It's like the semiconductor shortage that is confounding so many different industrials, leading to higher prices seemingly everywhere we look. That's going to put tremendous pressure on Fed Chief Jay Powell to change his stance.
You want housing supply shortages to cool? Raise mortgage rates. You want the semiconductor shortage to calm down? People buy cars with borrowed money, raise the cost of that money. It's the magic elixir to breaking the inflationary cycle. But it takes the companies' earnings surprises in a different and more dangerous direction. It takes them down and stocks down with it.
Third, we know that rates going higher ruins the competition to the higher yielding stocks. Not many stocks these days are supported by their yields, not after this run, but it will only get worse if rates go up. We've got a bit of a conundrum going right now. Today the companies with the best yields went up, perhaps because we are still in the aftermath of a weaker jobs number from last Friday. We also saw an upside surprise among the higher yielders: General Mills (GIS) told a rapt audience that business was coming in at the high side of estimates, in part because of pet food sales. When one food company does well, they all go higher. That's the power of the group think. That said, talk about terrible leadership. That leadership as well as the rally in the utilities leads me to believe that some participants have already decided that the Fed is going to throw us into a recession. I disagree with that analysis, but if you think we are at the beginning of a new rate-rising cycle it makes a ton of sense.
And who can blame people?
For our fourth concern we have a classic problem. Many Democrats in Congress and the president want gigantic stimulus packages that are sure to produce job offerings. There's only one issue -- we already have almost 10 million unfilled jobs. We have far fewer people looking for jobs than we thought. The only way these new jobs created by the government will be filled is by offering higher wages than currently available. That's inflationary in itself. But if you kill the stimulus package, then those on Wall Street who are depending upon it to prop up cyclical stocks will be disappointed. So, we are darned if we do and darned if we don't. The Fed will have to raise rates to stop the inflation that Congress is causing. Or Congress lets the bulls down and causing an economic downturn. There may be no way to win, especially if Congress feels the need to raise taxes to pay for the stimulus. Well, then again, there may be a way, it's just not a good way. What's that? A runaway delta variant, or some other variant, that slows down the economy in a way that the Fed doesn't need to put its foot on the brakes. Talk about a Hobson's choice: higher rates or more COVID. I'll take a rain check on both.
Finally, there is one last worry that just can't seem to stay on the radar screen, China.
All that said the natural buyers, the people who send money in every month to their stock mutual funds, will by their very nature sop up the supply that natural selling is causing. But the excess supply the endless IPOs are a nightmare for anyone who thinks that there is enough money on the sidelines to support prices. I am on the floor of the stock exchange every day and I am overwhelmed by the numbers of companies coming public, whether from ill-formed and ill-advised special purpose acquisition companies (SPACs) to raw money losers -- companies that have little or no hope of profits, but have catchy names and good ad campaigns. Remember, I always say that supply serves as a wet blanket on the fire of the buyers. It will eventually play out the same way it always does, as a selloff that lowers all prices to levels that stocks are more attractive. We can't seem to stop this deal flow, which is incredible given how poorly performing SPACs have been. Voracious, some, like me, would say greedy, sellers and bankers just aren't going to let up until the golden goose of public money is slain.
Finally, there is one last worry that just can't seem to stay on the radar screen, China.
With his emphasis on "common prosperity," President Xi is sounding more like Mao and less like any of the Chinese leaders since that fascist dictator ended his tyranny over the Chinese people. I don't care all that much about Xi's financial instincts; he wants the rich to give to the poor, noble as that may be. And we can all make judgments about his record on human rights: I'll give him an F. I just worry about his obvious attempts to take back Taiwan, which would certainly slow commerce, especially because our nation has foolishly allowed Taiwan Semi to be the most important and largest semiconductor company on earth. More important, of course, we could have a super power confrontation that will be existential in itself, and existential is bad for business.
Do I think that we can deal with all of these issues? Yes, but not at once, at least not without lower prices and lower prices is what September is all about.
By Jim Cramer
Wed, September 8, 2021
