Tuesday, February 17, 2009

Here's What's Working ... And What Isn't

Here's What's Working ... And What Isn't
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By Jim Cramer, Realmoney Columnist | 13 February 2009

Is anything out there better than it was four months ago, when the 'market' [[and Hank Paulson: normxxx]] let 'too-big-to-fail' Lehman fail? Some would say retail is better, because the aggregate numbers indicated things were better. I disagree. Anything with any sort of higher price point was a disaster in January, and there's a food war going on among Kroger (KR), Safeway (SWY) and Wal-Mart (WMT) that's disastrous for margins.

The Goldman Sachs piece yesterday talked about how Kohl's (KSS) and all of the other major retailers have stretched valuations, and that's a huge negative. The better ones are the ones that fired people. JC Penney (JCP) came out and said there are 100,000 people too many, hardly encouraging. Autos are a disaster. Next week we could see a bankruptcy for GM (GM) if the bondholders want to do it. Ford (F) is similarly a disaster. Chrysler is, too, although no one seems to care anymore.

Housing is so horrible that even though there are fewer homes being built, the devastating lack of a housing credit of any proportions will keep that industry on the skids. The Toll (TOL) call was truly sobering, with no bottom in most of their markets.

Aerospace seems to have dropped off a cliff. Even though the airlines have more money courtesy of cheaper fuel, they aren't ordering. That's truly bad news for Boeing (BA) and everything that goes in it. Defense is tailing off and will get worse courtesy of Obama.

I suspect from the way the stocks and the bonds of the casino companies are acting that Las Vegas Sands (LVS) and MGM (MGM) could be finished in their current form. Who the heck knows what's going on with the LBOs in that industry. That sector is nasty, as is the hotel space, as we see from Marriott's (MAR) numbers yesterday.

Tech? Unmitigated softness in every area, including software, hardware, semiconductors. Nothing. PCs? Nothing. Cell phones? Some smartphone pickup, but not enough to beat estimates. The Net? A slowdown in ads that accelerated this year. Bad for a fast-rising Google (GOOG). Apple's (AAPL) OK.

Agriculture? Deere (DE) has potential credit problems. Bunge (BG) was weak. So was Archer Daniels (ADM). Fertilizer seems to have stabilized because of China. Only Terra Nitrogen (TNH) is solid, though. [[And Monsanto (MON) still looks OK: paying $1.06, so far well covered by earnings, $4.16. Only the P/E at ~20x still seems a little high for this market.: normxxx]]

Machinery? Got nothing from U.S. infra, which would have made a big difference. Now just waiting for China to place orders. Nothing big in pipe. The broad industrials are all seeing weakness and a difficult first quarter. They don't seem all that buyable and definitely saleable on strength.

Food and beverage? Mixed. Coke (KO) good but Kraft (KFT) really bad. Heinz (HNZ) just OK. General Mills (GIS) good but Kellogg (K) not so hot. I think Pepsi (PEP) is good this morning, but I suspect it's going to be a long road back to even. P&G (PG)— a staple— nothing here, simply a bad quarter.

Drugs? Strong dollar wrecked the earnings profile. Pfizer's (PFE) play for Wyeth (WYE) expresses frustration, but no money for it. [[And Abbott Labs (ABT) still looks OK: paying $1.44, so far well covered by earnings, $3.13. Only the P/E at ~17x still seems a little high for this market.: normxxx]]

Oil? Really bad, just a terrible month for all but refiners as prices dropped severely, but refining margins stayed high. The group's numbers, like all of the estimates above, are just too high.

Banks? Really bad January with loan losses continuing to soar and mortgages disastrous. No sign of any of the initiatives from Washington working. More insolvency coming due to Geithner stress-testing.

So what has improved? First, there are indeed actual improvements in some areas. Here they are: Restaurants. We saw better numbers in McDonald's (MCD), Panera (PNRA), Chipotle (CMG), Darden (DRI), Brinker (EAT) and Buffalo Wild Wings (BWLD). Commodity costs have come down; labor has come down. I think gasoline coming down has a major impact on the whole group.

Health care, particularly heart care. A series of approvals have spurred St. Jude Med (STJ), Abbott (ABT) and even Boston Scientific (BSX) higher. I think it is a right move.

Biotech: Many approvals, some real upward momentum from Cephalon (CEPH), Gilead (GILD) and Celgene (CELG), plus lots of takeover talk in the air. A solid group with congressional backing.

Health care cost containment: The pressure's not on them. You can see that they are making their numbers and they are cash-rich. Nice comeback at UnitedHealth (UNH), which should be believed. Medco (MHS) is best in show and getting better.

Minerals: Here, pricing is troughing and beginning to improve, strictly because of demand from China. Could be an important grower here, and I think this group could run. Let's put steel into this, too, as pricing has bottomed and can go higher.

Finally, most surprising, investment banking. Every investment banking company. Credit Suisse (CS) said things are better. I know for a fact that Goldman (GS) is better. That's because credit, or at least bonds, are back being issued, and trading has higher margins as there is less competition. I also know from Knight Securities that this extends right up to last week. It's just a better time.

The balance tilts solidly toward a "worse" market, which is why it makes sense for the averages to keep coming down until the balance tips and we get more of these key areas bottoming and not continuing to go down.

Random musings: Abercrombie (ANF) seems to have bucked the trend on retail. I think it just went down too much. ... I like PEP very much, with real growth. ... The China play stocks now all rock at the opening— especially Nucor (NUE).

At the time of publication, Cramer was long Abbott, Celgene, Gilead, General Mills, Goldman Sachs, Pepsi, Procter & Gamble and Wal-Mart.

  M O R E. . .


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