A Zero-Sum Game

[Kuppam, Sudheer K]

Well written…from Cramer…J

 

Sudheer

Managing Director, Asia Pacific

Vice President, Intel Corporation

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You want leaders? This market's giving you some super-high-growth leaders. The only problem is that this kind of leadership creates havoc for just about everyone else. It's darned zero-sum out there on the battlefield.

First let me explain what I mean when I write about leadership. I first learned about leadership from the television show that got me interested in the stock market to begin with, Wall Street Week. Every Friday, the great Lou Rukeyser would walk out on the set and give you a pun-filled review of the week. He had his panelists whom I revered, none more than the late great Marty Sweig, who would opine about leadership groups. It's where I first heard the term cyclicals, although Lou in his own inimitable way would say, "sounds like a washing machine, speak English," and Marty would say, "companies with earnings that improve when the economy gets better and decelerate when it gets worse."

I have always tried to model myself on Lou and his insistence that people speak English to the audience. At the same time, I didn't want the show to be dumbed down too much so that I would listen to concepts like "the generals," the stocks that lead the market forward and make a judgment if their leadership is meaningful.

Some groups are much better leaders because they inspire much more buying. Or if you want to deviate from the military leadership analogue, some leaders have real pin action, and they can give you a spare or a strike far more easily than others.

The stocks that provoke the most pin action? The transports. If you see planes, trains and trucks doing well, then you know that commerce is humming. Now that we don't fear theFed every second -- or at least I don't because I have a lot more to talk about than just the Fed and don't like to default to it -- we welcome any sign that more commerce is being done. If there is more commerce, more shipping, more passengers, then there is more spending and more earnings down the road.

So we want the transports to be zooming. Unfortunately, trains and planes haven't been. The airlines have been up and down, the up occurring when jet fuel drops in price and the down occurring when it goes up. Ever since we hit what looks like to be the double bottom in oil in the low 40s, the group has stopped climbing. The rails are being hurt by the slowing of oil shipments as we learned from the shortfall in Kansas City Southern (KSU) that was announced yesterday. The group is trying an anemic recovery, but I think that it has to spend more time in purgatory before we find out how truly beholden the group is to oil, or, for that matter, coal, another cargo with horrendous fundamentals.

Second leadership you want? The banks. Why the banks? Because banks go up as a function of lending. Sure, we can respect the possibility that they can go higher because they can invest your deposits at a slightly higher price than they pay you. The real money, however, is made with lending, and lending's in fits and starts. You have to have either lending or a decent investment margin on the deposits, and right now, it looks like we might not have either as interest rates haven't gone up. That's the sign that things are getting better with the banks, and we don't have that.

The third worthy group of generals? The techs because they vie with the financials as the biggest group in the S&P 500.

Here we have good news and bad news. The good news is that there are definitely some tech leaders. The bad news these stocks are uniquely not cut out to lead because they very specifically don't have many followers. They are too busy disrupting everybody.

The five-star general today? Netflix (NFLX), which got a couple of pushes from analysts, no doubt noticing that this momentum stock hasn't done much of late and so it needs a nudge. I read all of the positive notes, but the sum total of them was that if you think the chord is going to be cut, or that Apple (AAPL) will make its own television menagerie, you will still want Netflix, so it will be the over-the-top winner.

I found this theory to be old hat and not all that important, but it got the stock going. The only issue with this general, though, is it doesn't inspire any other company to rally. Netflix disrupts everyone else. You don't want to own any cable company or broadcaster or movie house or entertainment enterprise if Netflix is winning. It's the ultimate zero-sum game.

Then there's Google (GOOGL). When Google goes higher, it usually means that other companies are going to get decimated. It has wrecked the advertising business and destroyed the online-media companies with its deadly programmatic selling programs that make it so that you can't possibly profit nearly as much as you used to from hosting ads. It has crushed the ad rates. Google is always threatening to wipe out everything fromYelp (YELP) and TripAdviser (TRIP) to AOL (AOL) and the Yahoo! (YHOO). Just like the articles you have been reading recently about government investigations that failed to stem Google's dominance, the company can really cause other franchises to crumble.

Then there's Facebook (FB). Facebook's been promoted to a four-star general in this market, but the promotion's based on Facebook destroying a lot of other companies' value. Today we learned that it is fashioning its own news service for its faithful and is corralling important media darlings to participate. Now many new media institutions have built their rosters by a shrewd use of Facebook. It seems as Facebook wants them to partner to build a better user experience. That's fine if you have an ad-supported business, but any media company with a paywall and a subscription business could be hurt by this. That's not a general, that's an eviscerater! Or how about the Facebook banking initiative. Or its NFL sports initiative? Could Facebook be the ecosystem you never have to leave? That's bad for so many companies' businesses. A general without a portfolio.

Finally, there's Twitter (TWTR). Here's a stock that's been sitting there, doing nothing for ages, a victim of rampant insider selling and a company that uniquely seems to be unable to capitalize on its own ubiquity. Think about it. Everyone on the Web and on TV is always proudly willing to display the little blue bird next to their Twitter handle. All I can say is how in heck can this company have all of that free advertising and not figure out the best way to monetize it.

But I think that's changing. I think it is figuring it out. And when it does, that will be one more nail in the coffin of the media because even the best of the best on any network would rather tweet than wait to be beaten on a story.

Now we know that there's worse leadership than these stocks. We remember that in 2008 the minerals and fertilizers led us up to unsustainable heights. They came crashing down with the worldwide decline in economic activity. We have seen Procter & Gamble (PG) and Kellogg (K) be brigadiers, but they are leading up the recession brigade.

Still, these generals are very tricky leaders because they are really disrupters that leave wreckage in their wake and take no prisoners of what amounts to be a pretty decent chunk of the S&P 500.

No wonder they charged up the hill and no one followed. They were crushed in the trenches before the generals went over the top.