Fed Might Not Have Full Control Over Inflation - Cramer's Mad Money (12/6/18)

by: SA Editor Mohit Manghnani

The trade dispute with China escalated after the arrest of Huawei's CFO.

US Concrete CEO Bill Sandbrook expects infrastructure bill in the next two years.

Goldman Sachs is trading below its tangible book value.

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Thursday, December 6.

Markets were in breakdown mode at the opening, but they recovered by the close and ended slightly lower as the Fed is expected to adopt a wait-and-watch approach after the widely expected hike in December. "This rebound is real and we should be buying stocks in zest. People are scared even after today's recovering," said Cramer.

There is weakness in home sales, auto sales, construction, high-end retail sales and in the stocks. There is a man vs. machine situation. The labor shortage is causing inflation, higher prices across the board, but labor saving machines are holding cost down by letting companies get few workers. It's an awfully awkward situation.

Fed is fighting four trends creating inflation on which they don't have any control:

  1. Trump's crackdown on immigration will lead to fewer immigrants taking lower wage jobs, translating into higher wages.
  2. Wages are going higher and boosting inflation.
  3. There is a genuine shortage of truckers in transportation, which is a major reason for companies to raise prices.
  4. Trade dispute with China escalated after the arrest of the CFO of Huawei.

"If you took a long-term approach, buying stocks into weakness today based on their intrinsic worth rather than their minute-to-minute value, you actually came out on top as the averages roared back from their lows. However, there are two caveats. We don't know what the White House is planning on trade and we don't know how the Fed will react to tomorrow's employment number. For today's lows to hold, at least one of these institutions needs to be rational and prudent. Who knows? Crazier things have happened," concluded Cramer.

CEO interview - Yum! Brands (NYSE:YUM)

The stock of Yum! Brands is up 12% YTD and was up 0.9% yesterday. The company had their investor conference recently and Cramer interviewed CEO Greg Creed to hear about the company's roadmap.

Creed said he believes in 'RED' which stands for relevant, easy and distinct. He plans to make all iconic brands RED. The most distinct brand is KFC with red and white strip buckets and finger licking good catchphrase. Pizza Hut is much more relevant with lower prices and delivery and Taco Bell is more relevant with younger customers and distinctive.

"We have three global, iconic brands. We have incredible scale. We have this global diversity. We're proud of the brands, but we're dissatisfied because we didn't get more growth as not every brand is great at RED and we can have some improvement," said Creed.

He adds that the best days of Yum are still to come. The company is trying to catch up in digital with Domino's with QuikOrder acquisition that was announced yesterday. It is going to drive engine growth with $2.5-3B worth of work. QuikOrder has 75 talented people joining Yum! who will be of great help. He clarified that GrubHub (NYSE:GRUB) is about delivery, while QuikOrder is about e-commerce platform and hence they went after QuikOrder.

The company plans to put 5,000 kiosks in KFC and Taco Bell by next year and has added 10,000 stores for delivery. Yum! Brands has 46,000 global restaurants worldwide and is opening 7 single restaurants in a day around the globe. No one has that footprint and no one has got that number of restaurants.

Spinning off Yum! China made rest of them dig deep and go for growth aspiration and deliver on it. Cramer believes YUM! Brands is a buy.

U.S.-China trade relations

The White House seems to have two China policies. In one camp there are the trade warriors, led by Larry Kudlow and Steven Mnuchin who want to do business, and in the other camp, there are the cold warriors aiming to slow China's rise as a global superpower with slowing, or even stopping, trade with China. The cold warriors believe some pain needs to be taken, even if it hurts corporate profits, to prevent China from challenging the U.S. hegemony.

In the past few days, there was news from both camps. While trade warriors are trying to come up with a better trade policy that includes pausing the rise in tariffs, the other camp saw spike in trade fears after the arrest of a Huawei global CFO on the charges of selling American technology to Iran.

The arrest occurred in Canada on Saturday and the stocks fell on the fears of escalating US-China trade tensions. "This means any tech company that does a huge amount of business in China, including Apple (NASDAQ:AAPL) or Micron (NASDAQ:MU) or Intel (NASDAQ:INTC) or Skyworks (NASDAQ:SWKS) or Qualcomm (NASDAQ:QCOM) or Broadcom (NASDAQ:AVGO), is worth a little less today than it was yesterday," said Cramer.

CEO interview - US Concrete (NASDAQ:USCR)

The stock of US Concrete is down 54.4% YTD and was up 5% in yesterday's trade even though markets were down. Cramer interviewed President and CEO Bill Sandbrook to get a sense of what is happening and whether there is light at the end of tunnel.

The company was negatively impacted as February, September and October were wettest in Dallas history and 2018 was the wettest year in Texas, but when sun is shining, they are selling record volumes. Orders are not being canceled but they are deferred.

There are over 70 projects in backlog excluding Amazon (NASDAQ:AMZN) which are larger than 20,000 yards, or roughly 11.3 miles. Amazon headquarters in Long Island city and Virginia is in sweet spot and is in the two most densely populated area.

"Public construction as a percentage of GDP is low on historic basis, but 29 states raised their taxes since 2013 to fund infrastructure projects and plans to cut some infrastructure funding was voted down. Where people actually get to vote for higher taxes, if they have a direct line of sight to the use for improved infrastructure, they support that," said Sandbrook.

"That still gives me optimism that the next Congress may be even a little bit more friendly to spending money, with a Democratic House, and that we will have something in the next two years," he added.

Cramer believes USCR is cheap considering next year's earnings.

CEO interview - Ollie's Bargain Outlet (NASDAQ:OLLI)

Ollie's reported good earnings but their guidance disappointed and the stock went down. Cramer interviewed Chairman, President and CEO Mark Butler to know more about the quarter.

Butler said tariffs are disruptions but they have the ability to benefit Ollie's as tons of orders are getting canceled and they are being purchased by Ollie's at lower prices. The business has never been better and their parking lots are full. "We are locked and loaded, sold more of toys and gonna sell more of toys," he added.

The company took over 18 Toys R' Us locations by buying 12 and getting 6 through leases due to the bankruptcy code. They have benefited by getting good inventory from Toys R' Us.

The company opened their first store in Texas, and started construction on third distribution center, which will be operational in 2020. They have 8.8M active members.

Viewer calls taken by Cramer

S&P 500 index funds: Buy the index fund as Cramer believes in diversification and S&P index fund is still the best in diversification.

Is the weakness an opportunity? Cramer said he is looking for value in individual companies and adding to S&P fund on big dips. The declines have not worked this year but he is still optimistic.

Alibaba (NYSE:BABA): Chinese American relationship has taken another step down. Don't get involved in it.

Goldman Sachs (NYSE:GS): It is significantly low from its all-time high and is a good entry point as it is below its tangible book value.

Tesla (NASDAQ:TSLA): Tesla is a winner if China is serious about lowering tariff, but issues are still pending. Cramer is not a fan of Tesla as he likes to trade on valuation.


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