big picture – ReportWire

Why bond yields are rising and what stock investors should do about that

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Bond traders are at it again, pushing Treasury yields higher and signaling the Federal Reserve was too heavy-handed when it cut interest rates by a half-percentage point last month. The recently rising yields have put pressure on the stock market — and specifically, names in our portfolio tied to housing. The 10-year Treasury yield — which influences all kinds of consumer loans, including mortgage rates — rose again Wednesday, reaching a session-high 4.26%. That’s a level not seen since late July when the yield had started to turn lower in anticipation of the Fed rate cut, which came on Sept. 18. Since then, though, the 10-year yield has been working its way higher. On the shorter end of the yield curve, the 2-year chart follows a similar pattern. US10Y US2Y 3M mountain Three month performance The hope when the Fed started cutting rates was that shorter-duration Treasurys would move lower at a greater pace than longer-dated ones, providing relief to borrowers and investors. That’s not what has been happening lately. The 2-year and 10-year yields have recently been moving higher together. Rates are like gravity for stocks — the higher the rates, the greater the competition for investment dollars. Elevated, risk-free government bond yields become an enticing way to get returns when compared to the volatility of stocks. A higher 10-year Treasury yield also halts relief on mortgage rates. The average 30-year fixed-rate mortgage, while more than 1 percentage point lower than a year ago, has moved higher three weeks in a row. In Freddie Mac’s latest weekly survey , the 30-year fixed rate was 6.44%. The Fed cutting rates represents an easing of monetary policy, which allows the economy to grow quicker and easier and makes debt more affordable. The downside of those dynamics is that a hotter economy also raises the prospects of sparking inflation again, just as it has started to moderate. Bond traders are worried about rekindling inflation because economic numbers have been coming in stronger since central bankers met in September. The market odds on a quarter-point Fed cut next month remain basically a lock, according to the CME FedWatch tool . But after that, the chances of a December cut are dwindling. A troublesome rebound in inflation, however, is not what we’re calling for, and it’s not what we’re basing the Club’s investment decisions on. Another dynamic pushing bond yields higher is concern over what happens to the national debt and trade deficit under a new presidential administration. Whether the move up in yields is a bet on next month’s election or reflects a that view that regardless of who wins, fiscal policy will remain loose, is anyone’s guess. Both presidential candidates do seem to agree on one thing: The cost of living is too high. A large, unavoidable line item on consumers’ balance sheets is housing costs, which have been one of the stickiest areas of inflation. For home prices to come down, we need more housing supply and lower mortgage rates to incentivize builders and to motivate sellers and buyers. Lots of would-be sellers are sitting on historically low mortgage rates and are reluctant to move, which drives home prices higher. Would-be buyers are reluctant to pay those higher home prices on top of elevated mortgage rates. Increased housing formation based on the Fed lowering rates is key to our investment cases for three stocks in the Club portfolio: Stanley Black & Decker , Home Depot and Best Buy . The bond yields rising and mortgage rates creeping up have pushed back the benefits of the Fed’s easing, as we explained in Tuesday’s small addition of more Home Depot shares. Ultimately, however, fighting the Fed has proved a fool’s errand in the long run — so, we do expect rates to eventually come down. In addition, the management teams at Stanley Black & Decker, Home Depot and Best Buy are executing effectively on the things within their control. Sure, they will benefit from lower rates — but rates alone are not why we own positions. We’re in them because the fundamentals are improving, which will only come further into focus when rates come down. Bottom line The rise in bond yields is not sustainable, in our view, because shorter-duration Treasury yields are bound to come down if the Fed applies enough pressure. The longer end of the curve should then come down and provide the needed relief on mortgage rates. When that happens, you will want to already have the rate-sensitive stocks on the books. We may have been early. But we’re ready. To give up on these names now, right when the Fed has broadcasted that the rate-cutting cycle is in effect, would be a mistake. By the time it becomes clear that the 10-year yield has peaked, you will likely have missed a significant part of the move. (Jim Cramer’s Charitable Trust is long SWK, HD, BBY. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Cars drive past the Federal Reserve building on September 17, 2024 in Washington, DC.

Anna Moneymaker | Getty Images News | Getty Images

Bond traders are at it again, pushing Treasury yields higher and signaling the Federal Reserve was too heavy-handed when it cut interest rates by a half-percentage point last month. The recently rising yields have put pressure on the stock market — and specifically, names in our portfolio tied to housing.

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October 23, 2024

We’re hiking our price targets on Nvidia and two other rallying portfolio stocks

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This week’s strong market pushed three of our portfolio stocks well clear of our current price targets. Since these rallies look like they have legs, we’re taking our numbers up. Nvidia price target increased to $1,050 NVDA YTD mountain Nvidia YTD Coming off a bullish GTC conference where Nvidia CEO Jensen Huang made the case that the artificial intelligence investment cycle is still in its early innings, we are increasing price target on the chip giant to $1,050 per share from $850. With such a big move this year, an over 90% gain, we’re reiterating our 2 rating, meaning look to buy on pullbacks. Not only did Nvidia unveil its next-generation Blackwell platform, Jensen stressed the importance of the company’s software. Nvidia is taking a page out of Apple’s playbook as Jensen builds a platform company driven by software and hardware working together in an ecosystem. “It’s not just a chip. It is a platform. Now what does that mean? It means it’s filled with software. What does that mean? It’s recurring revenue; it’s not one-off,” Jim Cramer said Tuesday. “There are a lot of people who say it’s a defensive move. I say it’s an offensive move.” Eaton price target hiked to $330 ETN YTD mountain Eaton YTD The need for all new AI data centers is going to increase the demand for electricity and new solutions to modernize the grid. As a result, we remain positive on power management company Eaton even after its big run of more than 30% in 2024. It hit another 52-week high on Friday. We’re increasing our Eaton price target to $330 per share from $290 and reiterating our buy-equivalent 1 rating. As a sanity check, Bank of America increased its Eaton price target to $340 from $330 on Thursday following a meeting with management. The analysts said the key message from the meeting was that growth opportunities are in their early innings. Indeed, in the company’s fourth-quarter report , management said its electrical backlog coverage is roughly three times its historic average, providing them the visibility of growth at least through 2025. Wells Fargo raised to $60 WFC YTD mountain Wells Fargo YTD Wells Fargo has made a string of new 52-week highs, and we think those gains can continue due to better-than-expected net interest income performance from higher interest rates, more buybacks, and ongoing cost discipline. Shares have already increased around 16% year to date, getting a big boost last month when a key consent order tied to the bank’s phony accounts scandal of 2016 was lifted. We’re increasing our Wells Fargo price target to $60 per share from $54 and reiterating our 2 rating. Since becoming CEO of Wells Fargo in 2019, Charlie Scharf has made good progress in clearing regulatory orders that predated his tenure. He’s still looking to clear the biggest one: the Federal Reserve’s $1.95 trillion asset cap. (Jim Cramer’s Charitable Trust is long NVDA, ETN, WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

NVIDIA’s founder and CEO Jensen Huang speaks during the annual Nvidia GTC Artificial Intelligence Conference at SAP Center in San Jose, California, on March 18, 2024.

Josh Edelson | Afp | Getty Images

This week’s strong market pushed three of our portfolio stocks well clear of our current price targets. Since these rallies look like they have legs, we’re taking our numbers up.

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March 22, 2024

Cramer: The Cassandras are wrong about the market (again) — here’s why I’m upbeat

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The boogeymen continue to be fictional, despite endless attempts to drum up fear and hasten the departure of millions of scared investors. I’m calling the endless negative prattle the “Bear Bilge,” the stuff thrown at us that seems so cerebral and intellectual, but just turns out to miss the mark. I’m being plenty genteel in that summary. I won’t stay that way. You know my thesis by now. There are dozens of commentators who come on-air and posit the “hard landing” scenario for the economy, making it clear that we are indeed on the eve of destruction. These Cassandras are from two camps. The first is made up of negative analysts who dug in their heels and overstayed their welcome. The second group is wealthy hedge fund managers and individuals who see no harm in generating chills simply because they don’t think they are doing so. They regard their fear-mongering as first class advice that can’t possibly have consequences. I get that. If the market crashes they will be lauded for a lifetime. if it percolates, big deal — they didn’t tell you to sell, they just told you not to buy. This “heads I win, tails you lose” mentality is rarely questioned because the media often shares the same bias. The impossibility of any company doing anything right, or as right as the market seems to judge, serves as the only homily worth offering. The sole exception is Warren Buffett who, aside from owning Apple (AAPL), provides no agenda beyond being a happy warrior and a buyer of a second-rate oil company. Sure, he deserves to get away with it, but a lot of his armor stems from history not from current events. It’s not like he’s endorsing Federal Reserve Chair Jerome Powell’s every move, or any move, and he’s the most optimistic of the opining lot. You can see why this is. The Fed has not distinguished itself over the years, with only former Chair Alan Greenspan getting an undeserved free pass. We remember Ben Bernanke, who led the central bank from 2006 to 2014, as the man who saved us from the housing crash, but not the one who caused the crash with endless rate hikes. We slam Powell as the man who kept rates too low for too long without ever considering that every other nation did the same. But we are the only one with great growth and falling inflation in the entire universe. Those who deride Powell never dare to discuss the disaster of the People’s Republic of China, with its once-inconceivable inability to generate any sort of growth even via inflation. An economy that’s one-quarter based on property can’t afford to have no gain in property values as has been the case for most of the year. An economy that’s trying to pivot and become like that of the U.S. — which is 60% service and not 30% as China sports currently — has failed miserably to do so even as it’s been the stated goal for a multitude of years. Sometimes deflation can be as hard to uproot as inflation. Right now what you own in China is going down in value, not unlike a car after it leaves the lot in our country. So why spend at all? It didn’t take long to dispel so many of the boogeymen. Earnings season kicked off with spectacular numbers from Wells Fargo (WFC), JPMorgan (JPM) and PepsiCo (PEP). Wells was expected to take in 10% in net interest income, now it expects to gain 14%. You couldn’t have a bigger delta for its most important line item. JPMorgan showed it is a true growth stock, with beats on the top and bottom lines, and has a ridiculous price-to-earnings multiple of 10. It used to be a big deal for PepsiCo to grow at 4%. Now if it doesn’t grow by 8% we are disappointed. Thank heavens it’s growing at 10%. The gains are no longer just in Frito-Lay. They are in carbonated beverages, too. The emphasis isn’t on good tasting versus good for you. The emphasis is on growth itself. Oh, and weren’t we supposed to fear higher utilization rates for UnitedHealth (UNH)? But what if it’s ready for those rates? Does that count? I’d say it does. So does the market. But let us deal with the bigger issues of the day, the things that were supposed to make equities more dangerous and the 2-year Treasury a more lovey blanket. The first? We had the dichotomy of “hard landing” versus “soft landing.” The cognoscenti swore to us that Powell would haplessly cause the plane to crash. We were just trying to figure out how well they foamed the runaway. The soft landing camp never told us what that really entailed. Shifting in the overhead compartments? But what if there was no landing. What if we just kept on flying because Powell was and is simply better than we thought. So what if he has the charisma of non-participating character. What do we want? Vin Diesel? Powell has set us on a course that plays for time and acknowledges that he’ll be bailed out of any real collapse in employment by the hundreds of thousands of admittedly blue-collared jobs that the multiple rounds of federal largesse will soon bring us. I have been harping of late on how hard it’s been to get all of these dollars to those who need them. The state regulations confounded many who thought that we would have already done the bulk of hiring and would probably be on the side of the firing. Instead, I put all of the spending to date on infrastructure, semiconductors and climate change at about 10%, with 90% about to hit the economy just when the Bear Bilge swore to us that we had to crash. You don’t foam the runway with trillions in federal spending. You simply don’t land at all. The genius of Powell is that he has played for time so well. We are finally getting the intractable items in the consumer price index — cars and rent — to come down. No, we don’t have deflation, just disinflation. The consumer has shifted her pattern of buying to going out and going away — two paths we’ve never seen before so we have no way to gauge their impact. The bears therefore presume the worst. I just say that the retailers have had a hard go because we never thought that anything could change our conspicuous consumption. Who knew that the xenophobes would even travel abroad? But that’s not all we learned. We had come to believe that the biggest of the boogeymen, commercial real estate, had become the ticking time bomb, or some other crank cliché. (Can we retire canary in a coal mine now that we almost never deep mine?) But then we listened to what we expected would be two of the three biggest offenders — JPMorgan and Wells, with only Bank of America awaiting — and we found the loan losses ridiculously low and the reserves dubiously high, making us think that we are going to have to blast some of these negativists with a couple of left hook roundhouses to the temple. But no one will actually do that because the media mogul fear complex can’t resist. You must resist. I know that next week Goldman Sachs (GS) will report and that once-rigorous-now-hapless entity will have to do some serious real estate reserve writing, if not outright write-offs, but the containment to that once-hallowed firm might be shocking but true. The bears just aren’t delivering on the goods on any key negative issue. Of course, the biggest worry to this market is its two-tiered nature: The mega-cap techs versus all the rest. The sense is that the mega-caps have to come back to Earth at some point. I can’t tell you how tempted I am to say that it’s the UnitedHealths and JPMorgans that will play catch-up. But even I, with card carrying bullish credentials, can’t argue for that cause. Nor do I like the leapfrogging of one artificial intelligence play over another, even as we own most of the lot. What has Alphabet (GOOGL) done to deserve its rally? You buy it simply because its CEO now gets that there is actual wood to chop when it comes to its bloated table of employment — not because it’s been chopped. The whole turnaround from a gentle to a precipitous decline in growth and then a pivot to upward revisions based on ChatGPT seems fanciful but enjoyable, certainly not as investible as thought. I like it because it seems to have regained its e-commerce crown. Microsoft (MSFT) owns so much of everything, including video games after its purchase of Activision Blizzard (ATVI), that I can’t come up with a reason to slag it. Although its CFO Amy Hood will most definitively. She won’t have the strong dollar to kick around anymore, though, as that earnings slayer has at last cooled off. Apple makes too much sense not to stay higher. Its ubiquitous nature seems to know no bounds and the fact that the iPhone 14 remains in play is a good sign, not a bad one. There is that much demand still for what we would call an old model. Of course, only those of us who have worn the Vision Pro know what awaits . And those who have not will play the needed role of antagonists. They will get away with their pessimism typically because they are telegenic, an interesting credential, to use a less-than-loaded term. Tesla (TSLA)? It’s Cybertruck will find adherents among the non-truck buyers, so no need to fret about that stock’s multiple. I am beginning to fret about Meta Platforms (META), if only because the Vision Pro is Tim Cook’s pro tennis entry to Mark Zuckerberg’s pickleball contestant. And then there is Nvidia (NVDA). It’s tough to ask for an encore to the $4 billion guide-up for this current quarter. The fact is though, you must think about the nature of computing as going from the multitudinous central processing unit (CPU) to the unique graphics processing unit (GPU), with Intel (INTC) and Advanced Micro Devices (AMD) ceding their actual existential need to that of Nvidia. You just don’t need a lot of CPUs in the new regime. What I suspect will happen soon will be a series of articles about how artificial intelligence is simply an overused term for recommendations (“If you like Colgate, you might like its tooth brush, or if you like Clive Cussler, welcome to Stephen King.”) Sure there will be lots of talk about how it displaces many people, but it hasn’t displaced anyone yet. If it were so powerful wouldn’t it be doing so? The articles won’t buy the “it’s a matter of time” logic and the reversal in Nvidia’s stock on Friday was breathtaking enough to allow the bears out of the den. All of that said, the bullish genie has unleashed the enterprise software hoards, the highest multiple group that has been dormant for ages. Now they are flying — Datadog (DDOG), Cloudflare (NET), Atlassian (TEAM) and the like. That means we are about to see a huge wave of issuance from that venture capitalist-loved sector. Meanwhile Federal Trade Commission Chair Lina Khan’s stunning defeat in the Microsoft-Activision case will lead to a ton of mergers. You can’t block everything. With that defeat, it’s time for the zealot with rigor, Jonathan Kanter from the Justice Department, to assert himself and tell corporate America how to do a deal that can pass muster. He can’t stop Khan, who has no rigor whatsoever, but he can blunt her errant ways with unassailable doctrine. So, put it all together and a more robust M & A market and a better IPO market — you heard it hear first —will take up the slack of the banks and put down the monotony of endless price target boosts from sycophantic analysts. At last they will be busy with new issuance. Now, the good news for the bears is that the next phase of the earnings season could be rocky. Look how the banks opened up and then just collapsed on the altar of State Street’s hideous numbers. Go figure how that piddling institution could erase the gains of Wells and Morgan, but it’s a reminder of how good news is still shunned as an outlier. To me, let’s get the overbought worked off. Let’s go toe-to-toe with the bears and our own mistakes as I did so in an incredibly naked fashion this last Monthly Meeting . Let’s bet that we will tread water until it’s clear that the we don’t have much to fear from the Fed or a recession — and earnings will be good enough to inspire some buying where stocks haven’t run, and some selling where a beat-and-raise is already in the stock price. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Visitors around the ‘Charging Bull’ statue near the New York Stock Exchange (NYSE) in New York, US, on Thursday, June 29, 2023.

Victor J. Blue | Bloomberg | Getty Images

The boogeymen continue to be fictional, despite endless attempts to drum up fear and hasten the departure of millions of scared investors. I’m calling the endless negative prattle the “Bear Bilge,” the stuff thrown at us that seems so cerebral and intellectual, but just turns out to miss the mark.

I’m being plenty genteel in that summary. I won’t stay that way.

You know my thesis by now. There are dozens of commentators who come on-air and posit the “hard landing” scenario for the economy, making it clear that we are indeed on the eve of destruction. These Cassandras are from two camps. The first is made up of negative analysts who dug in their heels and overstayed their welcome. The second group is wealthy hedge fund managers and individuals who see no harm in generating chills simply because they don’t think they are doing so. They regard their fear-mongering as first class advice that can’t possibly have consequences. I get that. If the market crashes they will be lauded for a lifetime. if it percolates, big deal — they didn’t tell you to sell, they just told you not to buy.

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July 16, 2023

Here’s what an overbought market and endless negativity tell me to do this week

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Not a great setup. There are too many articles and postings about how we are overdoing artificial intelligence, and how there’s not enough substance to justify recent market moves. There’s no question that the market, particularly the Nasdaq , has rallied endlessly on what amounts to the same information: Nvidia (NVDA) makes great cards; Adobe ‘s (ADBE) putting them to use; so is Meta Platforms (META) but we don’t know how; as are Microsoft (MSFT), Alphabet ‘s (GOOGL) Google and, most importantly, Oracle (ORCL); but don’t forget Broadcom (AVGO) and Marvell (MVRL). That’s worrisome, indeed. That’s why I am approaching this shortened week with a little trepidation There’s really nothing new that I can see short of analyst meetings from Samsara (IOT) and MongoDB (MDB), both loved, but both a little abstruse. They can’t move the needle. So, it seems to me this is the test week. Research right now is of no hope whatsoever. If a stock is up, we get price target boosts. If it is down, we get cuts. Nothing original, nothing against the grain. That’s been a major source of sustenance for a while now, but I think that we have had enough of it so perhaps that causes a pause. No matter, I think we get a pause, and we still don’t have a replacement for the AI theme. Do we go health care following President Joe Biden’s first campaign rally? Getting tougher. Financials ahead of the Federal Deposit Insurance Corporation penalties? Possibly, and a bunch of regional banks seem interesting. Have you seen that yield and price-to-earnings multiple on Truist, a truly good regional bank? The consumer-packaged-goods segment has been written off as past tense : Campbell ‘s (CPB) last quarter may be the template. Retail’s tough as nails: only Walmart (WMT) and Costco (COST) seem to pass muster. Transports? You are on your own because I think the Street is anxious to end the spell of revenge travel. How many times can you re-recommend the cruise ships? The industrials have been going up on the same thing for weeks now – a prospective Chinese stimulus plan that has not yet arrived and, perhaps, the Democrats’ infrastructure plan. I am not going to hide in oil and gas because I will be discovered in plain sight. Of course, there’s some hyperbole here, and heaven knows I am given to it. Still, I am worried about this week because for the first time in a bit I think we need to do some serious digesting. No, I just feel we have come to the point where I have more ideas to sell than buy. When I scan the market, I see many charts that are extended where, even though I like them, I wouldn’t be comfortable buying them. I am mindful that a stock like that of Adobe had a huge move into an excellent quarter and then raced up the hill even more on the numbers, supercharged by AI. That in itself is pretty amazing. But then, out of nowhere, sellers emerged and reversed much of the move. There’s some real fluff in the tape. I see fluff in a lot of places, maybe all but in the pathetic oils which seem to need a re-fill of the Strategic Petroleum Reserve pronto. At times like these, what I like to do is reflect on what it would take to put new money to work. We know now that we got no interest-rate hike from the Federal Reserve last week because the central bank seemingly didn’t know what to do – too many disparate folks trying to hammer out something they couldn’t, so why not postpone? But as I have been saying, we can’t seem to get unemployment up and wage growth down. The Fed knows you can’t get the stickiest part of inflation – rentals – down without more layoffs. We have them in tech and now finance, but not enough to make people abandon their homes or move back with their folks. That’s why I think they are really playing for time. They need more homes built, and they need the homebuilders to lose their discipline. To that I say, good luck. But what matters is that I feel we are fresh out of catalysts to go higher and that most stocks just don’t seem to be at levels that make sense to purchase. Why not just wait? That’s a tough one for most of us. We will want to jump at the first sign of a price break for fear of missing out. Yet, that, again, is worrisome. We don’t want to fear missing out. We want to buy things we want at our prices or else. Are these the prices we want for Microsoft? For Nvidia? So, let’s wait and see. I am willing to miss a percentage or two, maybe even three, to see if we can’t get a better basis on our stocks if we want to buy some. Given the market is officially overbought, I think I will wait until we have a couple of days down before it’s worth pulling the trigger. (Jim Cramer’s Charitable Trust is long NVDA, META, MSFT, GOOGL, COST. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Jim Cramer on Squawk on the Street, June 30, 2022.

Virginia Sherwood | CNBC

Not a great setup. There are too many articles and postings about how we are overdoing artificial intelligence, and how there’s not enough substance to justify recent market moves.

There’s no question that the market, particularly the Nasdaq, has rallied endlessly on what amounts to the same information: Nvidia (NVDA) makes great cards; Adobe‘s (ADBE) putting them to use; so is Meta Platforms (META) but we don’t know how; as are Microsoft (MSFT), Alphabet‘s (GOOGL) Google and, most importantly, Oracle (ORCL); but don’t forget Broadcom (AVGO) and Marvell (MVRL).

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June 19, 2023

How we feel about banks being required to bolster rainy-day funds after SVB failure

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We’re more apt to view the latest rumblings about a possible boost to bank capital requirements through a buyer’s lens when it comes to our Club financials Morgan Stanley (MS) and Wells Fargo (WFC). The Wall Street Journal reported Monday that financial industry regulators could announce a proposal, as early as this month, seeking to increase the rainy-day funds of big banks. Ever since Silicon Valley Bank failed in March, followed closely by two others, it’s seemed likely that U.S. regulators would want banks to be better prepared to weather future crises. Morgan Stanley and Wells Fargo, while never a worry during the recent mini-banking crisis, have both seen their stocks decline in the wake of the SVB collapse and struggle to regain their footing. In our view, the substance of the Journal report was largely expected and bank stocks have already reflected the potential for increased regulatory scrutiny dating back to the first bank blowup. According to the Journal’s reporting, the changes could amount to as much as a 20% increase in overall capital requirements at large U.S. banks, which must maintain a certain buffer against their risk-weighted assets in order to protect the clients (and the business) in the event of losses. One popular metric used to measure this, which we highlight with every bank earnings report, is the Common Equity Tier 1 ratio, or CET1 for short. The Journal also indicates that regulators will look to take into account the bank’s business activities, in particular, fee-generating activities — impacting a name like Morgan Stanley which generates large fees from its wealth management business. Critics of the potential regulatory update don’t believe that a fee-based approach is the right move, arguing it would penalize banks for something that isn’t always an operational risk. As members know, we like fee-based revenues because they tend to be less volatile than non-fee-based sources, which are largely reliant on interest rates. Should Morgan Stanley really be penalized more than others just because it offers fee-based wealth management solutions, which through strong execution have grown? Details on the possible regulator proposal are limited at the moment. However, we’re inclined to consider a capital requirement change opportunistically, especially as it relates to Morgan Stanley. At a higher level, the WSJ news, along with certain agreements made to get the U.S. debt ceiling raised — such as the resumption of student loan repayments and work requirements around the Supplemental Nutrition Assistance Program (SNAP), also known as food stamps, supports the view that Federal Reserve should forgo another interest rate hike at its June meeting next week. According to the CME FedWatch tool as of Monday afternoon, the market is putting nearly 80% odds on such an outcome. A “hawkish pause” is what some are calling it — a scenario in which the Fed would refrain from its 11th straight rate hike in as many meetings to allow more economic data to roll in and to gauge the impact of the direct monetary tightening already done. But the other part of the “hawkish pause” would be for the Fed to reiterate that it remains data-dependent and that rate increases could resume if necessary. The market, at the moment, is viewing the possibility of a rate cut before the end of the year as less and less likely. (Jim Cramer’s Charitable Trust is long MS, WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Bing Guan | Bloomberg | Getty Images

We’re more apt to view the latest rumblings about a possible boost to bank capital requirements through a buyer’s lens when it comes to our Club financials Morgan Stanley (MS) and Wells Fargo (WFC).

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June 5, 2023

Cramer: This is my game plan for the week ahead after Friday’s surprise rally

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What the heck really did happen on Friday, when the Dow jumped 700 points on a strong jobs reading ? Why such a viscerally positive reaction to an employment number that was hotter than expected? Was it because wages didn’t spike? Was it all that perfect — a Goldilocks report? Here’s my take on Friday’s rally. Going into the debt ceiling crisis, there was a belief that House Speaker Kevin McCarthy couldn’t control his own Republican party. Senate Majority Leader Charles Schumer wasn’t much better off with the Democrats. Both had lost control of their parties to the extremists. That meant the United States would default on its debt. It seemed pretty logical. I truly believe the extremists never believed a default would mean more than a few weeks of setbacks and more brinkmanship. Who can blame them? President Joe Biden lamely floated that he could invoke the 14th Amendment to avoid this and any future debt limit fights; the amendment includes a clause that some legal scholars say overrides the statutory borrowing limit set by Congress. No matter what, it was pretty clear that chaos was our destiny. But when McCarthy and Biden agreed to temporarily suspend the debt ceiling and cap some federal spending in order to prevent a default, we got a deal that was even less contentious than the 2011 bargain . (The coming together brought to mind the legendary coalition of President Ronald Reagan and House Speaker Tip O’Neil in the 1980s, memorialized in Chris Matthews’ “Tip and the Gipper: When Politics Worked.”) It was the compromise debt limit deal — not the employment number — that caused the market to rally. Sure, the jobs report showed wage inflation was cooling, which is good news in the Federal Reserve’s fight against inflation. But the job creation in May and the revisions were insanely strong. What matters most is that Fed Chair Jerome Powell, who is far more powerful than the independents on the Fed’s board who have such a hard time keeping their mouths shut, is reasonable. He seems to understand that it’s time to wait a bit on any more rate hikes. Not because he thinks things are cooler, but because he actually doesn’t even know. We have a young workforce coming into the market akin to when I got out of school in 1977 — nary a job to be had anywhere. This is potentially a monumental moment. The new debt limit legislation sets the date for resuming federal student loan repayments, which have been on hold since March 2020. We have the end of Supplemental Nutrition Assistance Program (SNAP) benefits and other pandemic breaks. Why not wait two months to see if unemployment naturally goes up and wages come down? To sum things up: We came into Friday shocked that there was a shocker of a deal and a not-red-hot employment number (at least one that didn’t send rates higher). This is what triggered the long-awaited buying of stocks outside of the Magnificent Seven that have led the market all year: Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), Tesla (TSLA), Meta Platforms (META), Apple (AAPL), and Nvidia , which briefly joined the $1 trillion valuation club. We each have our own way of monitoring these things. I used Club name Caterpillar (CAT) as my judge. On Thursday afternoon, CEO Jim Umpleby went into the lion’s den of Sanford Bernstein and told a tale about de-cyclization. Shares of the heavy equipment maker had a tiny snap back. One day later and armed with the budget deal and the employment number, CAT shot up seventeen points — an unheard-of short squeeze. This took the stock back to when it reported a good number that was converted into a bad number by bearish analysts still unwilling to admit that the company had changed its bi-polar ways. Of course, the bears would say that it only went up because of one more silly stimulus by China, this time to adjust rents. I say Caterpillar went up because it was overly shorted, like so much of the market, including retail, health care, financials, other industrials including the commodities (the oils!). We even saw the imperfect chipmakers and heavily challenged enterprise software stocks come alive. The shorts were correct to press their bets if there was no debt deal and we got an employment number that was a steamer. But they were wrong on both counts. This plus a rare wave of new money coming in and massive buybacks by companies capable of plundering after their reports, caused the broadening that had been bemoaned as non-existent as recently as the day before. You could argue it was a short squeeze of monumental proportions. A short squeeze happens when short sellers having to buy stocks to cover their short positions, pushing prices higher. But every time there has been a broadening since FANG, it’s always been called a short squeeze. That’s just how things work, although it’s never been acknowledged by anybody. Which brings us up to date for Monday. We have a blackout of the Fed speakers. We have no real macroeconomic data. We have no landmines of earnings. And no Fed meeting until mid-June. A true interregnum. We are going to have to take more things off the table if we get a rally into an overbought setting. Yes, we have some real stinkers — Disney (DIS), Foot Locker (FL), Emerson Electric (EMR), Estee Lauder (EL) — and we can battle them. But the important thing is that we have so many winners that we have to ring the register on some stocks if all goes our way. Of course I obsess on the losers. I didn’t think that Fabrizio Freda at Estee Lauder and Mary Dillon at Foot Locker could both blow it that badly. I had reason to dislike the Emerson team, but it still gave me more than I can handle. I have no idea how Disney’s stock could be this weak in a long-on-money-short-on-time moment. I am furious at myself for not seeing around any of these corners. But I am not going to throw good money after bad and I see no good on these names — yet. This leaves us with the big question: Which winners to trim? As long as we are not subsidizing losers, we aren’t breaking protocol. But we have two tasks. One is to come up with a new name that hasn’t moved that we actually like. And two is to trim into strength as we get overbought. I want both resolved by our next Club meeting on June 14. That’s what I am working on right now. Do we need so much Salesforce (CRM), even as it reported a good quarter all things considering? Do we even need Advanced Micro Devices (AMD) when it has nothing to rival Nvidia? I just don’t know. I want the market to tell me what to do. I think it will. Where does this leave us? In a sanguine week that will allow us to see if the short squeeze continues. If it does and continues to broaden, we can both peel some winners. See which caterpillars can develop into, well, Caterpillars. Maybe add Take-Two (TTWO), which gave us a two-year outlook, possibly aided by a new Grand Theft Auto game and better Nvidia cards. Just one of many ideas. But one Jeff Marks and I are trying to get our arms around. Some who read might ask: “Shouldn’t there be more of a thesis behind a bullish move?” I say no, no more than you needed in 2011, when the debt ceiling deal led to a fantastic rally because Armageddon was avoided. We cannot sit back and relax. But what we can do is accept that it is a better moment than we thought not that long ago. There are cracks. The Dollar General (DG) call was a compendium of weakness for the lower middle class and the Macy’s (M) call was a confusion of negativity. But who is to say that these companies just don’t have the “it” of Five Below (FIVE) or Lululemon (LULU). We are close enough to the infrastructure money wave to handle another rate hike if we need it. But Powell recognizes the futility of another rate hike right now because it lowers mortgage rates, making his job even harder. What we can do is watch and wait as battlegrounds get resolved — like CAT did on Friday. We can anticipate better things from a Johnson & Johnson (JNJ) — especially with a 3M (MMM) deal — and from GE Healthcare (GEHC). We can lick our Estee and Foot Locker wounds. And we can be glad that we got through the debt deal and wax in the wave of new money that will at last be coming in. No, we can’t be complacent. Too many needs for the shorts to save themselves. They have been run over in so many places that they have to make a comeback somewhere. Their number didn’t get so strong before the debt ceiling deal that they can’t all cover at once. Nevertheless, we have enough money to put to work if we want to in a new name that hasn’t moved and has a special situation thesis. But I do not want to be so relieved as to think there is no woods, just that we are out of it for now. Personally, the last few weeks have been hard ones, ameliorated by members who have made money with the club. Some mistakenly believe that we missed this entirely rally. It galls me because I gave up being a hedge fund manager years ago and I know the truth: This may be the best we’ve ever been, and this time it is for you, not the entitled class. I thank you all for letting us have the floor to help and not be tools of the traders who have infiltrated our ranks. So let’s take and make some gains and be ready for the next storm after the calm, wherever it might be coming from. Rest up. We have gotten past the systemic chaos into business as usual, where we can glow in a world where stock picking matters. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

US President Joe Biden, accompanied by Speaker of the House Kevin McCarthy, Republican of California, arrives for the annual Friends of Ireland luncheon on St. Patrick’s Day at the US Capitol in Washington, DC, on March 17, 2023.

Saul Loeb | AFP | Getty Images

What the heck really did happen on Friday, when the Dow jumped 700 points on a strong jobs reading? Why such a viscerally positive reaction to an employment number that was hotter than expected? Was it because wages didn’t spike? Was it all that perfect — a Goldilocks report?

Here’s my take on Friday’s rally. Going into the debt ceiling crisis, there was a belief that House Speaker Kevin McCarthy couldn’t control his own Republican party. Senate Majority Leader Charles Schumer wasn’t much better off with the Democrats. Both had lost control of their parties to the extremists. That meant the United States would default on its debt. It seemed pretty logical.

I truly believe the extremists never believed a default would mean more than a few weeks of setbacks and more brinkmanship. Who can blame them? President Joe Biden lamely floated that he could invoke the 14th Amendment to avoid this and any future debt limit fights; the amendment includes a clause that some legal scholars say overrides the statutory borrowing limit set by Congress.

No matter what, it was pretty clear that chaos was our destiny. But when McCarthy and Biden agreed to temporarily suspend the debt ceiling and cap some federal spending in order to prevent a default, we got a deal that was even less contentious than the 2011 bargain. (The coming together brought to mind the legendary coalition of President Ronald Reagan and House Speaker Tip O’Neil in the 1980s, memorialized in Chris Matthews’ “Tip and the Gipper: When Politics Worked.”)

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June 4, 2023

Here’s what I want to see before buying in a stock market that stumbled on solid bank earnings

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We just had three fantastic quarters from three disparate banks, and I didn’t read a good word about them. Think about this. JPMorgan (JPM) reported such an outstanding quarter that I had to read it twice to believe how it could possibly have been that good to rally this very big-cap stock by almost $10-per-share. Almost $10. This is not some tech stock beating faux estimates and being loved by idolatrous research analysts. This is JPMorgan, like the House of Morgan. I have not liked the stock of Citigroup (C) after it began to diverge immensely from its tangible book value (TVB). I do not understand how it could be double the price of the stock when the TVB means that if you closed the bank that’s what you would get. Hmmm, you buy Citi at $50 per share and you get almost a double if CEO Jane Fraser decides to close it? I don’t think so. Put aside that nagging oddity for a second and you have to be impressed with the quarter. I would go as far as to say that Citi seems to become just plain cheap, especially if it sells Banamex, one of Mexico’s biggest banks, for a good price. Looks like the celebration of the far-flung is, at last, joyously over. I know the stock of Wells Fargo (WFC) didn’t do much after it reported. That was just a wrong reaction. The bank, a core position of my Charitable Trust, really did beat the top and bottom line quarterly numbers handily, bought back $4 billion in stock — and yet, it added so much more capital that it has more than it did before the buyback started. It’s oozing with cash. WFC YTD mountain Wells Fargo YTD peformance More important, Wells Fargo is almost done peeling back the regulatory onion. It has had to spend fortunes in fines and technology and risk management hires that I can’t believe it had such a good efficiency ratio, a number I regard as important as all of those net interest income and margin numbers that everyone is so possessed about. Those were, of course, great, too, but that’s simply a question about how stupid the deposit base is. The dumber the base the less likely it is to leave for greener pastures. Wells Fargo’s base seems pretty dumb, but we might see dumber this week. Now, I offer the story of these banks as a preamble to what I see happening in the stock market right now. Bank stocks are notorious underperformers in the aggregate and have been labeled uninvestable by many including, at times, yours truly. That’s because they have become trading vehicles. They screw up too often. Which is why Friday was so remarkable. Bank trading is like playing Russian Roulette with three bullets. Usually, half are going to blow your head off. Instead, we went three for three. Have bank CEOs suddenly become the most brilliant CEOs in the world? No. But this is one special moment for the U.S. economy. First, you have everyone running scared, which is, by nature, good news because banks make far fewer mistakes when they run scared. And, they are making far fewer mistakes. Second, all three showed that the American consumer is still pretty flush and is not living beyond their means. There’s a little increase in bad debt, but nothing like we used to see before Covid. Maybe the aftermath of the pandemic has introduced still one more new wrinkle on the financial landscape: people want to spend but they don’t want to go broke. Third, this commercial real estate boogie man, while real, may not be real for those who know how to lend. We spill barrels of ink, or billions of characters, on how commercial real estate is the graveyard we whistle past or the most hated cliche of my era, the canary in the coal mine, and we never talk about who owns the bad loans on “Class C” and “D” buildings. I know who doesn’t: these banks. Now, I know the cynic says that the grade is in the eye of the beholder. That’s just not true, though, because what these companies do, quite cleverly, is describe where these buildings are because what seems to matter most is density. If there is a shortage of real estate then a not-so-hot piece of real estate earns a “B”, not a “C” or “D”. Yes, that’s me talking, but if you want to go over every building that has a loan that’s current and decide that it isn’t, well, don’t own any banks, period. Finally, there’s a really interesting backfire going on here with what the Federal Reverse is accomplishing, and it’s not all bad. The pandemic produced savers with miserable savings rates. Now these same savers are getting very big, safe, returns on their capital. Their frugality — except, I think we will find when they are on vacation — is matched by their better returns on their holdings. Sure, Wall Street snobs will laugh at those who have $100,000 and are now picking up a few extra percent. But these are the same jackasses who live six months and a day next to The Breakers resort in Palm Beach, Fla., where a dozen stone crabs cost $779 and they don’t mind. So, what they heck to do they know? This brings me back to the most important point of what happened Friday: Our worst fears about spiking bad loans of the auto, credit and home variety didn’t come true and therefore won’t come true this coming week. Amazingly, like the “stays-in-Vegas” cliche — what happened at a bank that loaned against pre-IPO companies while investing at a moronic part of the bond market yield curve, seems to have stayed at Silicon Valley Bank. Or, at least, it has stayed long enough that if there is another bank failure, there’s been plenty of time to come up with a plan. I don’t want to conflate a day of good bank earnings with a month of good stock prices. We are still overbought and are now getting less overbought, which is actually a time when stocks tend to go down. We also know that there are so many people who like to talk about the Fed that there will be a steady drumbeat of negativity. The Fed never inspires positivity — and if you ever say that it does, you are branded an idiot rather quickly. But if are going to name-call, I can tell you that the only thing easier to opine on without doing any homework besides politics is the Federal Reserve. Can there be any other explanation why recently you could go from a prediction of a 50-basis-point interest rate hike, to a 25-basis-point hike, to no hike, to a possible emergency cut, then back to no hike and then all the way back to a 25-basis-point hike, and still be taken seriously? Only if everyone is telling the same idiotic tale. Still, because we live and die by Fed chatter, you can’t rule out some rollercoaster action, not in the plain vanillas that define the week ahead— from the likes of Club holdings Johnson & Johnson (JNJ) on Tuesday, Morgan Stanley (MS) on Wednesday and Procter & Gamble (PG) on Friday — but in the over $500 billion club of techs that always manage to be at the forefront of stock despair. Not economic despair. Just stock despair. Bottom line Maybe that’s why nothing is grabbing us right now, nothing new, nothing exciting. It’s not like we demand lower prices, but believing that things aren’t as terrible as we thought and deciding to put money to work should not be confused. I think it’s fair to say that earnings could ratify prices not necessarily boost them, so why not wait for better prices for more committing of capital? We have made our sales. We have our cash. I am not asking for Dollar Tree pricing (the store, not the stock). But would a bit of a discount from Hermes and Vuitton be too much to ask? (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

People walk past a Wells Fargo branch on January 10, 2023 in New York City.

Leonardo Munoz | View Press | Corbis News | Getty Images

We just had three fantastic quarters from three disparate banks, and I didn’t read a good word about them.

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April 16, 2023

This Friday could hold the key to our bank stocks and the direction of the market for weeks

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The countdown is on. Earnings season is set to kick off Friday with the banks, one of ours among them. The whole sector came under heavy pressure last month after the collapse of Silicon Valley Bank. How the banks deliver could set the market tone in the coming weeks. Much of this mini-banking crisis ties back to the Federal Reserve’s war on inflation, with the rapid rise in interest rates pressuring loan values and increasing competition for deposits. Central bankers are not solely at fault for what happened at SVB on March 10 as management there was clearly out to lunch. But many economists feel the Fed does share some blame for keeping money so cheap for so long coming out of the Covid pandemic and subsequently having little choice but to hike interest rates at a breakneck speed to thwart spiraling prices. Currently, another quarter-point rate hike is widely expected at the Fed’s May meeting. However, there’s a growing minority who believe the recent banking stumbles should keep the Fed on hold. Jim said Monday that such a pause could spark a big stock market rally while keeping rates high enough for banks to make money. But, first things first. Ahead of Friday’s bank reports, which include first-quarter numbers from Club holding Wells Fargo (WFC), we’re watching three main things: the mix of deposits and loans and the resulting money made on the difference in the form of net interest margin (NIM). How these dynamics play out will factor into the Fed’s next rate move — and as a result, market sentiment. Deposits The chilling effect of the Silicon Valley Bank failure has been palpable. As highlighted by Jim Cramer in his Sunday column , total U.S. commercial banking deposits dropped by nearly $65 billion on a seasonally adjusted basis for the week ended March 29 , nearly three weeks out from SVB’s failure. That’s 10 straight weekly declines , according to bank assets and liabilities data from the Fed. It’s a harsh reminder that accounts in excess of $250,000 are not protected by the FDIC (Federal Deposit Insurance Corporation). Not to mention, withdrawing money without warning has never been as frictionless as it is today — thanks to online and mobile banking. (It’s worth noting the government has backed all deposits at failed banks and has said it stands ready to help elsewhere if needed.) Since deposit levels directly contribute to a bank’s ability to make loans, it’s not surprising that commercial bank lending declined in recent weeks. While the roughly $45 billion drop for the week ended March 29 was less than the $60 billion decline the prior week, it was still indicative of financial tightening. Focusing on deposits at the major banks when they issue their quarters — specifically Wells Fargo, which we think is reasonable to believe saw inflows during the tumult— will signal their overall health and whether they’re in a position to ease up or lock down lending standards. Lending As a result of the sub-optimal deposit situation, lending is taking a hit because banks must maintain certain capital levels. To put a finer point on the bank lending slowdown, Bloomberg looked at the roughly $105 billion decline from the week ended March 15 to March 29 and found it was the largest two-week drop since the central bank started tracking these figures in 1973. That’s a double-edged sword. If money is harder to come by, then anything purchased with a loan such as a car or a home is going to see demand fall. That, in turn, can put pressure on the broader U.S. economy, two-thirds of which is fueled by consumer spending. Again, it’s the kind of slowdown the Fed has been trying to engineer but not at the expense of further hurting the banks just as the sector started to find its footing since the SVB-driven debacle. It could be that we’ve seen all the financial institution tightening that we need to see given that on a seasonally adjusted basis, the average residual (assets minus liabilities) across all U.S. commercial banks in March is on par with the average we saw in February before SVB blew up. However, that’s going to depend largely on deposit dynamics, which rely on confidence in the banking system and how competitive savings account rates are in comparison to high-yielding short-term CDs, money markets or Treasurys. Net interest margin The difference between what a bank pays depositors in interest compared to what they charge customers for loans determines its net interest margin, also known as NIM. Banks generate interest income by borrowing at a lower rate (think deposits/liabilities) and lending at a higher rate (think home mortgages/assets). They have the flexibility to some extent, based on market forces, to tweak that equation. They could always incentivize deposits by raising the rates they’re willing to pay account holders to prevent them from bolting. But in doing so they would have to accept a smaller profit. Wall Street hates that. On the flip side, to protect NIM and net interest income (NII) in a tighter banking environment, financial institutions may have to keep deposit rates relatively low versus alternatives — which means deposits are harder to come by — or raise the rates they charge on loans, making them less affordable and negatively impacting demand for the goods purchased with those loans. Bottom line This is obviously a tough setup for the banks and makes them difficult to invest in. As a result, the reason we are in Wells Fargo has less to do with the operating environment and more to do with it being a self-help story with turnaround catalysts in the form of achieving regulatory milestones. To be sure, Wells is a traditional bank that must deal with short-term deposit and lending gyrations. But we think it’s pretty solid from the deposit side — and by virtue of its higher capital controls, it can’t go crazy giving out loans. As for Club holding Morgan Stanley (MS), which reports its quarter next week, we value management’s focus on fee-based wealth management revenue and investment banking operations. Given this setup, we are comfortable with our slightly greater than 7% cash position in the Club portfolio, believing that a Fed pause would cause a rally. On the other hand, a more dogmatic Fed would prove harsh for the market overall but benefit the tech sector, which is still working through cost cuts and can put still put out growth against a slowing economy. Once again, it comes down to owning a diversified portfolio that provides areas to book profits and buy into weakness no matter the market environment. (Jim Cramer’s Charitable Trust is long WFC, MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

People walk past a Wells Fargo branch on January 10, 2023 in New York City.

Leonardo Munoz | View Press | Corbis News | Getty Images

The countdown is on. Earnings season is set to kick off Friday with the banks, one of ours among them. The whole sector came under heavy pressure last month after the collapse of Silicon Valley Bank. How the banks deliver could set the market tone in the coming weeks.

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April 11, 2023

We’re looking for stocks to buy for the Club now that regulators saved SVB depositors

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Phew, that was close. Too close. I think that there was so much fear engendered by the events of the last 72 hours since Silicon Valley Bank collapsed that there will be investors who want to sell no matter what. I think that posture is ill-advised. The fact is the Federal Reserve and other U.S. regulators did everything a rational bull could hope for, and a little more than that, to mitigate contagion from the SVB failure. I like cutting to the chase: What the Fed and Treasury did Sunday evening was take a huge chunk of risk — and losses — off the table by promising to make SVB depositors whole (and those of smaller Signature Bank in New York, which was shuttered Sunday). If the Fed had not acted the way it did, I am convinced we would have been in a recession by Friday. You can’t just wipe out a bank and about $170 billion in SVB deposits and expect to see business as normal in the country. Anyone, I mean anyone, who had more than $250,000 in an account with a bank would, Monday, have sent that money to JPMorgan , which has the best balance sheet. Period. So, while there were plenty of people I heard Sunday evening and will hear Monday who will talk about moral hazard, the unintended consequences of doing nothing is to throw a huge number of people out of work because of the errors of one bank. That’s just wrong. It is what the Fed was set up to stop. What it means for markets I want to go into the markets first before I go into what happened. The actions Sunday evening were, per se, bullish versus what was going on since last Tuesday when Fed Chairman Jerome Powell said things were still running too hot. I think after this weekend’s events he has to question that. If he’s prudent, Powell should say we have to wait and see and may not even do raise interest rates by 25 basis points at the Fed’s policy meeting later this month. If he feels the 25 was already a done deal, so be it. But it would be a little hasty not to wait and see who has been hurt already by what’s occurred. We had some real flight to quality on the long end of the bond market’s yield curve that is now being undone and rates on the short end are going down — all of which is in keeping with the events of Sunday evening. But let’s put it right out there: We just got a reprieve from a massive wipeout of deposits and companies. We are less likely to have a rate hike. We are very oversold in the stock market. There were many shorts in the market Friday betting against the policymakers. Bad bet. What investors should do So, one word comes to mind: buy. Now, we don’t like buying up and we’re restricted on many names in the Club portfolio. But, if you were concerned, say, about a big series of rate hikes so you sold the stock of Caterpillar on some weird downgrade to sell last week then you are getting your chance. I mention CAT because it had the most egregious decline in the whole portfolio If you sold the stock of Morgan Stanley you have to wonder why you did it. The bank is in great shape. If you sold shares of Wells Fargo , well, I don’t know what to say. Some say WFC’s numbers have to be cut because it will be in a bidding war for deposits. Oh please, it’s got more deposits than it needs. We will have a full list Monday — but I can tell you that I am eying anything that got hit since Tuesday as something that should be bought. I also think that you have to be more cyclical than we would otherwise be because the actions to save the SVB depositors are also going to make the Fed move slower, if at all. The Fed can’t move too quickly anymore because there are other banks and brokers that do indeed look a little like SVB when it comes to their bond portfolios, not their depositors, and they have to take some medicine. If the Fed moves too quickly, the medicine won’t have time to have an impact. Yes, the other banks that invested as stupidly on the curve as SVB did will live to play another day, like it or not. Fortunately, almost no one had the horrendous mismatch that SVB had — very few retail depositors and very many long bonds that they were under water on. They shouldn’t have been allowed to do that. Almost everyone in the media wants to dwell on moral hazard and blame, etc. There’s plenty of time for that. You don’t come to me for moralizing for heaven’s sake. With the biggest risk of a recession — bank failures — off the table, we can all find things to buy. I would let the early bird buyers take things up. Then let the bears who need the market lower try to take it down, and the sellers who want 5% on cash bolt, too. At that point, we can buy (unless something opens up down in the morning that we like). Debate: Bank bailout or not Was it a bailout? Depends on who you ask. If you are a shareholder of the bank or a holder of its corporate bonds and preferred, nope. You just lost everything. If you are a depositor, let’s just say you aren’t going to be so foolish as to concentrate your deposits going forward. Earn a little less. If you are a sightseer? You just missed a crash that would have engulfed you for certain. We live to play again. One more note The closing of Signature by New York authorities was surprising. The bank was only said to have about 15% of its assets in crypto. But it did have a very low retail share of deposits, like SVB, so perhaps that may have had something to do with it. Either way, what a warning if you don’t have a broader deposit base and you have a lot of crypto or borrowing against crypto. (Jim Cramer’s Charitable Trust is long CAT, MS, WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Sheldon Cooper | Lightrocket | Getty Images

Phew, that was close. Too close.

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March 12, 2023

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