Watch That Red Hot Index
By James J. Cramer
8/31/99 8:02 AM ET
Will the Red Hot index defy gravity and kick some butt today, no matter what? After all, it is the end of the month. In the grandstand style with which momentum managers approach this business, there is nothing like taking your stocks up to make sure that you win top honors for the monthly sweeps.
Ain't it the truth that money management, like the big networks, has to put sweeps-week programming on at month's end to be sure that the public learns how strong the numbers are. At the end of many months we see some dynamite move in the Red Hots of the moment as this process plays out.
I know I will be watching today to see if these stocks start getting some lift as managers take them as far as they can go in a day. And why not? If they go up huge, that assures that the managers could get a shot at pushing themselves on TV and get even more money in, which, as we know, is what the game is about anyway. (Please don't get sanctimonious with me about this issue. Many, many managers are asset gatherers primarily, not performance managers.)
These managers can, of course, justify these month-end purchases because:
The stocks are already absurdly valued, so what's another four or five times revenues among friends?
They know they are going to get more money in anyway, so what's the difference, whether they buy them on the last day of the month or the first? and
You can't disappoint the marketing department.
Why are we in this jam in the first place? Good question. We can have such serious outsized performance in a handful of stocks because lots of other stocks just aren't working. Let me tick down some groups and state what ails them, painting with a broad brush, of course, and you will see what I mean.
Aerospace: Still not recovered from Asian turndown and Boeing's (BA:NYSE) troubles.
Airlines: Labor costs, higher fuel costs.
Banks: Higher short rates, especially bad for margins and credit card woes.
Brokers: Suddenly lower volume, meaning the August numbers will disappoint.
Chemicals: Higher feedstock costs from the rise in oil are ruining margins (Lyondell (LYO:NYSE)).
DOT: Hurt by both rising rates and surfeit of underwritings. Too many players.
Drugs: Tend to underperform in period of rising rates, plus nagging Medicare fears.
Farm equipment: Disastrous quarter for everybody involved.
Foods and drinks: Commodity costs were uncertain this quarter, plus volumes were disappointing for sodas.
Food stores: Declining margins, increasing competition.
Health care: Medicare payments and other government programs intervened to destroy profitability in many sectors. Competition among businesses (Becton Dickinson (BDX:NYSE), Boston Scientific (BSX:NYSE), Medtronic (MDT:NYSE)) for share made things tough anyway.
Housing and housing-related: Deathly during period of higher rates.
Metals: Consolidation has occurred already.
Motors: Very sensitive to higher short rates, tend to underperform when Fed raises rates rapidly.
Newspapers: Fear of Net players' impact on margins.
Oil and gas: Fears that prices have peaked and will be headed lower.
Oil and gas drilling: Budgets did not increase fast enough during the price rise and the rise may have peaked.
Papers: Collapse of wood-product prices this month.
Retail: Competition from DOT companies beginning to squeeze margins.
Restaurants: Collapse of theme players.
Savings and loans: Slowly dying industry hurt by online players and rising rates.
Steels: Imports ruined pricing.
Which leaves tech. Within tech there are certain groups -- those that make the Net run faster, and those that make telecommunications better -- that have been the beneficiaries of a fabulous spending cycle. Within those subgroups there are 25 or so companies that are just on fire. Those are the 25 that are working.
Everything else provokes no interest whatsoever. So those workers become Red Hots.
Hence the Red Hot index. Watch it today. Let's see if the players play the sweeps game.
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