Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Thursday, July 5.
Thursday was another day that the market did not show strength. This means investors should sell into market strength and raise cash. Why does Cramer think so? It's the bonds.
The bonds are seeing a flat yield curve. This means that the difference between the 2-year treasury yield and 10-year treasury yield is less. When this happens, it's a sign of an upcoming recession. "Normally, when the two-year's at 2.5%, I would expect the 10-year to be at 3.5%. The two-year currently yields 2.56% and ten-year at 2.83%," said Cramer. "That matters because when you have a flat yield curve, it does usually presage a recession. It’s a sign that investors are worried about the future," he added.
"If the Federal Reserve were to raise rates again too soon, it's possible that the two-year Treasury would indeed yield the same return as the 10-year," Cramer noted. If the long-term rates don't go higher, the banks will not make money on long-term loans and they form 20% of the S&P 500. The stocks of banks and homebuilders are benefited by higher rates, and yet, they are going down.
"Only some major selling of 10-year Treasurys - something I do not expect - or a pause from the Fed on rate hikes - something I don't expect - would improve this picture," he added. The other issue is Trump's tariffs taking effect, and this could lead to retaliation tariffs, resulting into a full-fledged trade war. Hence, money managers are selling the homebuilders, industrial and automakers.
"Because I don’t expect the Fed to stop raising rates, large sellers of bonds to materialize or President Trump to change his mind about tariffs - regardless of the collateral damage to the stock market - I've got to temper my bullishness," Cramer observed. The market doesn't have enough strength to sustain. It's time to raise cash on up-rallies.
In a market that is worried about inflation or trade war with China, FANG stocks come out immune to both these issues. These stocks also outweigh any economic slowdown or commodity-based pressures. They are secular growth stocks.
Facebook (NASDAQ:FB) continues on its growth path despite the recent scandal. Netflix (NASDAQ:NFLX) continues to expand in overseas markets and is innovating. Amazon's (NASDAQ:AMZN) latest acquisition of PillPack will strengthen its move into the pharmacy business, while Alphabet (GOOG, GOOGL) is the only laggard stock that has grown 8% in 2018, although it has a ton of cash and opportunities to make money.
"I know nothing lasts forever, and it’s easy to see why these FANG stocks are reviled for being too high, too fast, too rich, too whatever. But that’s been the case ever since we coined the term five years ago. Who knows? Maybe it'll be the same five years hence," concluded Cramer.
The IPO market is hot. It's mostly about demand and supply, but that doesn't mean every stock should be bought into when the demand remains high. There are bunch of China-based companies that have IPO'ed recently, and many are low-quality stocks.
The online video streaming company iQiyi (NASDAQ:IQ) is touted as China's Netflix. The stock rallied till $46 by mid-June, only to fall into the low $30s by early July. "Hey, who wouldn’t be intrigued by the Chinese Netflix? But this kind of stock is very difficult to value, and I think it needs to cool off more before it’s worth even considering," said Cramer.
The enterprise software companies have also overheated, and hence Carbon Black (NASDAQ:CBLK) went down 28%. Another China-based online entertainment company came public in March: BiliBili (NASDAQ:BILI). The stock as much as doubled from its listing price by June, and eventually declined to settle at a dollar above the listing price.
"At the best of times, I am hesitant to recommend all but a handful of Chinese companies. This is not the best of times," Cramer cautioned. "The next time some fresh-faced IPO catches fire, think about all of the recent turmoil and remember to take profits rather than letting your gains ride, at least on a portion of your position," he concluded.
CEO interview - Paychex (NASDAQ:PAYX)
Cramer looks forward to interview Paychex CEO Marty Mucci, as the company gives a good picture about employment strength. Paychex's recent earnings were in line with revenue growth.
Mucci said that apart from revenue growth, the company raised its dividend by 12%, and the profits from tax reforms were used to return capital to shareholders and create new products.
He added that the human resource outsourcing business is gaining momentum, as small businesses cannot afford to have a full-fledged HR. "One of the biggest issues they’re worried about these days is, because of the risk, how do they handle harassment? What kind of policies should they have in place, and how do they deal with it when somebody does complain? We're hearing this a lot. That’s the top topic of concern right now," the CEO said.
Commenting on the economy, Mucci said that the South is seeing the best growth in business, while the West has the highest wage growth. The manufacturing sector is seeing the highest growth, but the growth rate is slowing slightly.
Viewer calls taken by Cramer
American Airlines (NASDAQ:AAL): Do not sell, as it's down far too much. The stock will bounce when oil goes down.
A.O. Smith Corp. (NYSE:AOS): If there is good news on industrial stocks, it will take off, but the inverse is also true.
Pivotal Software (NYSE:PVTL): It's a terrific company with a good CEO and is worth a buy.
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