Rolling with the repercussions of federal policy changes

  • By Carole Ann Furman

  • June 23, 2018
  • 12:48 am BST

Two significant economic things transpired in the US in the last week, at least one of which will hurt stocks. The Trump administration imposed a 25% tariff hike on a significant chunk of Chinese imports, and the Federal Reserve indicated that it sees implicating rate hikes as strategically sound at this point in time.

According to Mad Money host and stocks guru Jim Cramer, it’s the latter issue traders should take note of as higher rates will not sit positively with the stock market. The market may be rallying, but Cramer expects a short break given that rates are still near historical lows.

Cramer points out that in terms of trading strategies, it’s not impossible to make money when rates rise – it’s just going to become more challenging. That’s because higher rates will gradually slow the economy and make bonds more attractive with every quarter-point rise. Retail stocks, for example, are likely to take a pelting while bank stocks will be boosted. Additionally, banks will also benefit from a range of mergers, starting with the Time Warner deal. Despite retail having a hard time, Cramer says he’s still a fan of FANG – Facebook, Amazon, Netflix and Google (via parent company Alphabet). Ultimately, it’s about understanding those market fundamentals Warren Buffet brought up again in his most recent 2018 shareholders meeting.

Restoration Hardware (RH) – a lesson in unconventional retail expansion

Chairman and CEO of RH, Gary Friedman, was Cramer’s chat guest for his ‘Executive Decision’ segment. In the last three months, RH shares were up 104%, having rallied 37% in the last week alone on the back of great quarterly data. And Cramer thinks the shares could rally again.

So why did these phenomenal results catch investors unaware? Friedman says RH’s reinvention of existing retail models meant that Wall Street missed everything the company itself had predicted was on the cards: bigger stores as opposed to fewer stores altogether, membership models instead of promos, and a massive balance sheet innovation. That balance sheet move came in the form of two issued convertible bond deals totalling $600m when rates were low and the capital wasn’t needed, which now placed RH in a position to buy back shares at the time everyone had given up.

The new media landscape is the one to explore

One of the biggest news items as far as the stock market goes in the last week was, of course, the potential merger of AT&T and Time Warner, with the courts giving the go-ahead for the deal. Cramer says this is less about a merger fallout – or the precedent it now sets for other big mergers – but a bid by the courts to save dying traditional media outlets. According to Cramer, traditional media simply cannot thrive in a world where costs are so high and revenue so low, despite the Justice Department’s best salvage attempts. So as for Cramer’s trading tips, new media is therefore the one to watch, as it has been for a while.

Identifying giant companies

The market’s big winners are those companies with market caps over $100bn, with 2017 yielding eight new names making this list. Nike, Netflix and Adobe are just three of them, with Adobe now being in a league of its own, thanks to being king of cloud computing services, says Cramer.

Of bulls and bears

When it came to picking the bulls from the bears, Cramer felt bearish about the following: New Residential Investment (NRZ), Karyopharm Therapeutics (KPTI), and Casella Waste Systems (CWST)

Bullish sentiment went to Kemet (KEM), Xylem (XYL), Iovance Biotherapeutics (IOVA), Boston Scientific (BSX), Waste Management (WM), and Magellan Midstream Partners (MMPt).