Here’s why we’ve seen the lows of this tough market

Jim Cramer at the NYSE, June 30, 2022.

Virginia Sherwood | CNBC

Things sure look different from Italia!

Yes, I do take vacations. And yes, they almost always lead to dramatic declines that have me called back or called in.

Not this time. 

This time it was a rout. An oversold rout as, once again, the S&P Short Range Oscillator got it right: We were at the outer limits of a very oversold market. My favorite market indicator was at minus 7.82% on Friday after a wicked few weeks. (Anything below a minus 4% is flashing an oversold signal.)

The excellent news here? We are still oversold at minus 5.78%, which is usually the sign of a powerful rally with more room to run, rather than one that is running out of gas. That’s rather amazing given the proximity of the Federal Reserve’s next rate-hike decision in two weeks, and a couple days from the next Consumer Price Index (CPI) release on Tuesday.

The Street is watching this key inflation indicator to figure out whether the Fed will raise interest rates by 50 basis points or 75 basis points. Economists surveyed by Bloomberg predict headline CPI increased 8.1% in August over the previous year, making the setup a little more benign that it has been recently. But anything higher than 7.1% won’t change the hawks minds.

Still, I like that setup. It’s why we bought so much and continued to buy with the exception of some highly profitable trims in the oils.

When you are away from the so-called action, you think this market may not be nearly so perilous. I hear what the bears are saying loud and clear. Even after all of the crumbling of so many tech stocks, we still aren’t near curing the overvaluation that very much still exists. There seems to be no stopping the rising yield on the 2-year Treasury. Makes sense. That’s going to be a “get out of the way” piece of paper whether the Fed does 0.75 point hike or not. That’s a huge issue and an uncomfortable one. Plus, the capital markets just seem closed. That’s not a sign of a healthy market. 

This is not 1999

But here are some thoughts that might make you feel that we are further along on the downside. Let’s attack things head on. Many prominent analysts and, more importantly, Club members believe that last week was chimerical and this is just the beginning of a monstrous rollover. Some members have urged me to overlay the 1999-2000 market over this one and you come up with a pretty serious indictment.

When I hear these things, I always like to ponder some stock history. First, I lived through that period. The companies that soared and fell at the turn of the century tended to be companies that were so overvalued on sales — let alone earnings if they had them — that the comparison seems fatuous and fanciful on the fundamentals. If you strip out Cisco (CSCO), Microsoft (MSFT) and Intel (INTC) from the top twenty Nasdaq leaders back then, you will find a majority of companies that were losing buckets of money — many of which no longer exist.

Compare that to today. Do you really think that most of the tech companies that represent “leadership” are that bedraggled? Do you think that the top dogs will cease to exist? I think that when they are better capitalized than almost every nation, including this one, and the majority sell at high teens price-to-earnings multiples, the jeremiads seem … overdone.

How about the former leaders away from FAANG? How about the semiconductor stocks? Now I know I share the idea that these were overvalued. Our sales indicate that. I think that our share purchases, like last week with Advanced Micro Devices (AMD) and Qualcomm (QCOM), will turn out to be as good as the sales were — a tall order.

Here’s why: The critics see the charts of these stocks and they muse that they are just beginning their next leg down — interrupted by last week’s buying interregnum — something that should restart this week. They say most times when we have these declines they don’t end at these lofty levels. 

To which I counter: Qualcomm, perhaps the single most overvalued stock at the top of the Great Tech Crash of 1999-2000, sells at 10 times earnings. Intel sells at 11 times earnings. Broadcom (AVGO) sells at 13 times next year’s earnings. AMD, with its vicious pummeling, now sells at just 19 times earnings. At 40 times earnings, Nvidia (NVDA) is too high. But it’s been cut in half, so I am reluctant to say it’s game over now.

More important than the values of individual names, how about the declines from the top? Consider that the VanEck Semiconductor ETF (SMH) is now down 40% peak to trough. What if I told you that this kingpin chip ETF “only” fell 31% during the surge of Covid-19, 29% in that brutal 2018 winter and 23% in 2015, when China was feeling so much pain, pain that it really hasn’t transcended. 

A sign is posted at the Nvidia headquarters on May 25, 2022 in Santa Clara, California.

Justin Sullivan | Getty Images

Yes, it is true that of the usual suspects, Micron Technology (MU) has had multiple times on the cross with declines of 44% in 2021, 44% in 2020, 50% in 2018 and 70% in 2016. What if I told you it has already fallen 43% from its top this time around and that it sells for just 6 times earnings. Punishment enough?

How did these get to be so bad? First they lost the personal computer. Then they lost gaming. Then the cellphone because of China. Now we are hearing that the data center is slowing. 

But wait a second. What if China, the biggest market in the world, comes back online. Do you think these prices will be this low? The bears have gotten quite cocky in their rather old age.

I am not saying tech has fallen enough. I am very concerned myself about Club holding Nvidia. But it is not a big position and won’t be unless it comes down more.

Positive signals

Am I turning a negative (the declines are steep) into a positive (we’re further along to a bottom)? I don’t think so. I believe that all of tech is playing with that one Chinese hand behind its back. Many of these companies are buying back immense amount of stock. We are also seeing insider buying — not selling a la 1999. 

The biggest issue facing the group is the lukewarm analyst community who are continually cutting price targets just like they raised targets on the way up.

It is true that the market has no appetite for these stocks. Nor does it have an appetite for tech IPOs. That, we know, is a positive. It’s often a harbinger of good things to come, like the 2014 tech rally that started when they nailed the IPO market shut. No more selling Peter to buy Paul.

Now we lack the kind of M&A (mergers and acquisitions) market we had then. To jog your memory, think of the sotto voce bidding war between Salesforce (CRM) and Microsoft (MSFT) that broke out over LinkedIn in 2016.

But there is a silver lining. We have a bond market that will not be appeased until there are more layoffs. We are used to layoffs of the Ford (F) variety like we just got with 3,000 positions eliminated. But we aren’t used to layoffs of the Silicon Valley and friends kind, like those from Amazon (AMZN). Or those jobs that will be lost if we don’t see any IPOs. I don’t see any coming, do you? 

This may be the first time we see tech layoffs lead the charge downhill. The job hopping that was so prevalent at one time in the group will reverse itself given that this group has learned to work remotely.

Now, we step back and say, where is it that tech must lead the bull. How about banks? How about health care? Stranger things can and have happened. 

More important, if the big issue is wage inflation, and we can somehow measure these people, then we can stop fretting about everything else. The grain complex says we are closing in on food inflation, at least the raw foodstuffs. And I have no idea how housing can stay up with chary lenders and the industrials need Europe and China to come back if they are going to make any headway in further price increases. 

No sense being a Pollyanna on inflation if the Fed isn’t ready to do so. I don’t want to be that. I called pretty much the exact top in commodity inflation, but that’s not enough and I am not disagreeing with that conventional wisdom. 

Ukraine remains a wild card

Let me move on from tech for a moment, which is a bad elephant in the room, and go to Ukraine, which, barring nuclear war, is the good elephant. 

I have spent a great deal of time studying Russia’s wars in Chechnya, the first from 1994 to 1996, which Russia lost, and the second from 1999 to 2009, which it won. It’s widely presumed that the Russians lost the first war against these fractious but proud people because Boris Yeltsin was in charge, but they won the second one because Vladimir Putin had ascended to being dictator-in-chief and waged a brutal and violent war against them.

Not true.

Yes, Yeltsin was diffident and his army totally flabby and poorly prepared. 

And yes, Putin sent in a more disciplined army with better arms and a smarter battle plan.

But the real reason why Putin won was because many Chechens turned toward Russia and away from their own leadership. The breakdown of the fragile coalition that held Chechnya together allowed the Russian army to advance much more quickly, gaining adherents as it went along.

Ukrainian troops advance in Kharkiv Oblast on Friday, Sept. 9. The country’s soldiers have burst through Russia’s lines and liberated dozens of towns and villages in a quick, mechanized assault.

Anadolu Agency | Anadolu Agency | Getty Images

Could Putin have bet that the same thing could have happened in Ukraine? Refugees this time, though, didn’t embrace Russia. They headed west like in Chechnya, but this time it’s west to Central Europe.

It’s also possible that this military that he’s operating with, which is one that is regarded as a police action force a la Vietnam and Korea, simply is as poorly run and equipped as the 1994 version not the 1999 version.

Ukraine is a huge wildcard. Is anyone in the bear camp really ready for a peace deal dictated by the West? Or that the West gets its energy and, in return, Putin is allowed to stay in power?

Crazy?

No crazier than what we thought when Russia first invaded its neighbor.

Maybe that’s what the collapse in oil is really telling us. If that’s the case, can the Russians really withhold expensive natural gas from Europe.

It’s not going to happen, but our energy complex could have been a big winner here, as well as our nation, strategically. But the left hates fossil fuels enough to cut their noses off to save their faces. 

Russia, the bears could say, is one of those situations where the worst it gets the more likely it is to go nuclear. I have no answer for that because we all know our portfolios won’t meant that much to us in that scenario. Sigh.

So what do we do?

You know how we feel. We are trying to find terra firma. I don’t like September and I am not a big fan of October. I don’t think we get through unscathed. But the lows?

I still think we’ve seen them.

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