If you want to keep the Federal Reserve on a slow course to raise interest rates to a reasonable level — let’s call it 3.5% — we need to see three things: Big layoffs in the thousands A suspension of buybacks to preserve cash Store closings and promotions that save a middle class consumer in the throes of inflation everywhere We are beginning to see a smarter consumer spending less, both at the store and on vacation. The former is because of the exorbitant price increases in every aisle and the latter is much more because the airlines have made traveling too unpredictable. Now some of the causes of inflation are getting tamed. Freight is getting calmer. Parts are more available, albeit at higher prices. And while absenteeism is still a problem, it is slowly becoming less of one. Price increases still seem inevitable. It’s almost as if every company is pushing higher costs through to consumers, but none seem to have geared up for the price hikes except Costco (COST), which shows you why its performance is so solid. I do fear it will take a Justice Department case against a group of producers to demonstrate some sort of price fixing, but those cases are hard to win, let alone to bring. Nevertheless, there does seem to be plenty of gouging. But that’s all a different phase of the Fed’s fight. It seems to have won on most commodities, including foodstuff, so I could see that the 75 basis-point rate increases might be off the table. We might learn more when Jerome Powell speaks at the Fed’s annual Jackson Hole gathering at the end of this week. The Fed’s range for its key short term rate — the fed funds overnight bank lending rate — stands at 2.25% to 2.50%, following back-to-back hikes of 75 basis points in both July and June. The central bank, which is pitched in a battle to control decades-high inflation, increased rates by 50 basis points in May. Monetary policymakers started their current rate tightening cycle with a 25-basis-point increase in March. The Fed is set to meet next month. The market is now is giving better 50% odds on another 75-basis-point hike. Now we are on the more intractable side — wages and rents and food — and these are truly difficult for a Fed to beat with its blunt instruments. But beat it Powell-and-team must, and we will find out how they’re doing by looking at the three signposts, mentioned above: More layoffs We need to see companies cutting jobs to become more profitable or to stay in the game. More cuts are coming because the environment is going to get more harsh. The first will have to be companies that are trying to adjust to the more strapped consumer, the one who isn’t turbocharged by the federal government stimulus anymore. I would say that the retailers and restaurants are likely to shed staff. Also, do the auto companies need all of those people if they are going to go against Tesla (TSLA) CEO Elon Musk with electric vehicles cars that require fewer parts and fewer people to produce? That could reverberate all the way up the food chain. Can the oil and gas companies keep all of their workers if they need to reduce emissions? On Monday, one day after we first published this commentary, Club holding Ford (F) cut 3,000 jobs, mostly in North America . The stock dropped nearly 5% after the news. Can Meta Platforms (META) make it work with so many of their employees not in the metaverse, but the boss is deeply ensconced? Does Alphabet (GOOGL) need to replace anyone? Why would the number of people being laid off at Amazon (AMZN) stop at 100,000? On my trip this summer to Silicon Valley, many executives told me off-air that the layoffs were coming. It was one of the 15 things I learned during my week on the West Coast. But the toughest will be the special purpose acquisition companies (SPACs) and the recent initial public offerings. Take a look at Wheels Up (UP). A year ago this company raised $650 million. Now it has about $400 million in the bank has a market cap of $562 million. How long can a deluxe private jet company last? I know that the memesters are betting on Weber (WEBR), but have they looked at the grill maker’s balance sheet? Almost no cash and $1.3 billion in debt. That’s what happens when you force a deal by cutting shares and price. Wayfair (W) is cutting 5% of its workforce, but does anyone remember how poorly that company was doing before Covid? Suspend buybacks More companies need keep their much-needed cash. If you listen, for instance, to the recent earnings call from Kohl’s (KSS), you will be flabbergasted to hear about how the dividend is sacrosanct. In the meantime, the retailer’s cash position is about as low as I have ever seen it. Now they had excuses for it on the call, but I can’t say I bought them, especially after the accelerated buyback left them so high and dry. Why the heck were they using their money to buy back stock? But you could ask the same thing about Bed Bath & Beyond (BBBY). Its interminable buyback has now left the company in dire straits. Talk about self-inflicted wounds. How many of those stores are profitable? If they are not, can the buybacks be justified? We discussed the BBBY blow-up on Friday and how after a meme stock unwinds it spells trouble for the Nasdaq. Store closings and promotions Why do so many chains need so many stores when the stores are subject to rising thefts? No, this time there are no Sears; no JCPenney. But I would expect more closures in the malls if business doesn’t pick up as we still have too many stores. Go listen to the recent Estee Lauder (EL) quarterly earnings call if you want to know the future. They are closing 250 unprofitable stores and eliminating 2,500 to 3,000 positions globally. We’re watching EL in our Bullpen . Or see what the brilliant Mary Dillon does with Foot Locker (FL) to right-size that operation. The footwear retailer on Friday appointed the former Ulta Beauty (ULTA) head as CEO. The economic boom spurred by the federal government during the pandemic gave us too many jobs and the infrastructure jobs will not make up for them. But this is a tough one, because by all measures the economy only became different two months ago. As it settles in, the layoffs will occur. Now we are seeing trade-downs everywhere which should put pressure on the weakest of brands. We know that there are too many supermarkets, given what we are seeing from Walmart (WMT) and Target (TGT), so we have to watch that cohort. Too many drugstores post-Covid. Too many people running hotels after the success of Airbnb (ABNB), also a Club Bullpen stock . Too many restaurants because of DoorDash (DASH). Walmart will certainly have to dole out more and better deals to get rid of its $1 billion worth of excess inventory. Other trade downs: the incredible buys on refrigerators and home entertainment on Best Buy’s (BBY) site. In the meanwhile, I am seeing heavy consumer branded goods at Ollie’s (OLLI) and soon TJX at marked-down prices. Bottom line As the Fed goes back to work next month, we are going to hear that there is more work to do, which means the job market is still too strong. The only place we actually need more jobs is in the building of multi-family homes. I simply do not understand why that is not happening. You would think that the large builders would get a handle on what is really needed — expensive rentals — and make it happen. Instead they are relying on scarcity of homes to keep pricing unfathomably high. Now this part of the downturn is very painful. Sure the job market can afford the layoffs — at first. But if they come from thinly capitalized outfits that recently came public, they will be in the headlines constantly. Without them, though, the Fed will have nowhere to go but continuing to raise the cost of money by selling bonds — which it has done very little of — and raising rates, which it’s well along doing. Either way, you need some safety here to go with your offense of old. Some Eli Lilly (LLY) to go with your Honeywell (HON), some Procter & Gamble (PG) to go with your Ford (F) . Just know that earnings seasons will get tougher not easier from here for many industries. They will also be very good for a handful of others which we intend to present to you. (Jim Cramer’s Charitable Trust is long AMZN, COST, F, GOOGL, HON, LLY, META, PG. 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.U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the headquarters of the Federal Reserve, July 27, 2022 in Washington, DC.
We need to see three things if we want to keep the Federal Reserve from raising interest rates too fast.
Consumers are spending less at the store and on vacations. The former is due to the high prices in every aisle and the latter is due to the airlines making travel too unpredictable.
Some of the causes of inflation are being fixed. The freight is starting to calm down. There are more parts available. Absenteeism is still a problem, but it is getting less of a problem.
It seems like price increases are always inevitable. It's almost as if every company is pushing higher costs through to consumers, but none seem to have geared up for the price hikes, which shows you why its performance is so solid. It will take a Justice Department case against a group of producers to show that they fixed the price. There seems to be a lot of price hikes.
That is not the same as the Fed's fight. The 75 basis-point rate increases may be off the table because it seems to have won on most commodities. Powell will speak at the Jackson Hole gathering at the end of the week.
The Fed’s range for its key short term rate — the fed funds overnight bank lending rate — stands at 2.25% to 2.50%, following back-to-back hikes of 75 basis points in both July and June. The central bank, which is pitched in a battle to control decades-high inflation, increased rates by 50 basis points in May. Monetary policymakers started their current rate tightening cycle with a 25-basis-point increase in March. The Fed is set to meet next month. The market is now is giving better 50% odds on another 75-basis-point hike.
Wages, rents, and food are difficult for the Fed to beat with its blunt instruments. We will find out how they are doing when we look at the three signposts.
Companies need to either cut jobs or stay in the game. The environment is going to get harsher. Companies that are trying to adjust to the more strapped consumer will be the first ones. The retailers and restaurants are likely to part ways with staff.
Is it necessary for the auto companies to have all of those people if they want to go against Musk with electric vehicles? That could affect the entire food chain. Is it possible for the oil and gas companies to keep all of their workers?
On Monday, one day after we first published this commentary, Club holding Ford (F) cut 3,000 jobs, mostly in North America. The stock dropped nearly 5% after the news.
Is it possible for Meta Platforms to make it work with many of their employees not in the metaverse? Is it necessary to replace anyone? There are 100,000 people being laid off at Amazon. Many executives told me off-air that they were about to lay off workers. During my week on the West Coast, I learned about 15 things.
The most difficult will be the special purpose acquisition companies.
Take a look at Wheels Up (UP). A year ago this company raised $650 million. Now it has about $400 million in the bank has a market cap of $562 million. How long can a deluxe private jet company last?
I know that the memesters are betting on Weber (WEBR), but have they looked at the grill maker’s balance sheet? Almost no cash and $1.3 billion in debt. That’s what happens when you force a deal by cutting shares and price.
Wayfair (W) is cutting 5% of its workforce, but does anyone remember how poorly that company was doing before Covid?
A lot of companies need cash. You will be surprised to hear how sacrosanct the dividend is when you listen to the earnings call from Kohl's. The cash position of the retailer is very low. I can't say I bought them even though they had excuses on the call. They were using their money to purchase stock.
You could ask the same thing aboutBBBY. The company has been left in dire straits because of its lengthy buy back. Talk about self-destructive tendencies. How many of those stores are making money? Can the buy backs be justified if they aren't? We talked about the blow-up on Friday and how it could have a negative effect on the stock market.
When the stores are subject to rising thefts, why are there so many stores? There are no Sears or JCPenney this time. If business doesn't pick up, I expect more mall closings.
If you want to know the future, listen to Estee Lauder's earnings call. They are closing hundreds of unprofitable stores and eliminating thousands of jobs. EL is in our bullpen. Mary Dillon does a great job with FootLocker to right-size it. The ex-ULTA head was appointed as CEO by the footwear retailer.
Infrastructure jobs will not make up for the lost jobs because of the economic boom spurred by the federal government. The economy only changed two months ago. Layoffs will happen as it settles in.
The trade-down should put pressure on the weakest brands. We have to watch that group because we know that there are too many supermarkets. There are too many drugstores post- Covid. There are too many people running hotels after the success ofAirbnb. There are too many restaurants because of Door Dash.
Walmart will have to do a lot more deals to get rid of its excess inventory. Best Buy has great buys on fridges and home entertainment. I am seeing heavy branded goods at TJX at marked down prices.
The job market is still strong despite the fact that the Fed is going back to work. Building multi- family homes is the only place where we need more jobs. I don't know why that is not happening. You would think that the large builders would be able to make it happen. They are relying on scarcity to keep the price high.
This part of the downturn is very hard to deal with. The job market can absorb the layoffs. They will be in the news a lot if they come from outfits that recently came public.
The Fed will continue to raise the cost of money by selling bonds and raising rates without them.
You have to have some safety here to go with your offense. Some Eli Lilly to go with your car. Earnings seasons won't be easy for many industries from here. We intend to show you how good they are for a few other people.
Jim Cramer has a Charitable Trust that is long AMZN, COST, F, GOOGL, LLY, and Meta. For a full list of the stocks, see here.
Jim Cramer will give you a trade alert before he makes a trade. Jim waits 45 minutes after sending a trade alert to buy or sell a stock. When Jim talks about a stock on CNBC, he waits 72 hours after issuing a trade alert to execute the trade.
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