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Many years ago, at a meeting in the training program at Goldman Sachs, we were being quizzed about our knowledge of the markets. The instructor, Dave, tough as nails, Dave pointed to me and said, "Jim, what's the principal determinant of the price of the stock of Delta Airlines?" Wheelhouse. Right in my wheelhouse, like a big fat pitch, a curve that hangs. And I could visualize the ball rising to the upper deck as I talked.
Dave, I told him, Delta, which traded at $34 with a PE of 7, is hostage to the price of oil and unhinged variable cost, and PRASM, or passenger revenue per seat mile, as well as CASM, cost per available seat mile. With Delta, well, both are above industry standards, but it has a low PE, so I could see it rising over time. Oh, I smiled the whole time, rattled off all that information. I mean, who knows more than me? Oozing with youthful self-confidence.
"No," Dave said, "it's hostage to the long bond, the 30-year Treasury. Now, leave this room, go outside for the rest of the meeting. Might help you learn something, including some humility." So, beet-red face, tail between my legs, I walked out of the meeting of 24 young people, my peers, and stood around waiting in the hall for his conclusion. I never forgot the seared embarrassment. I really hated Dave for a really long time. But I learned a valuable lesson: the long bond, the 30-year Treasury, is in charge of everything.
So in a day where we had much more downward pressure because of interest rates, especially the long bond, you saw the damage the bond market can do, with the Dow sinking 317 points, or 0.58%, and the NASDAQ falling 0.65%. The long bond responding to higher oil prices, of course. Why was Dave so sure that the long bond would control Delta's share price and not the fundamentals of the actual business? Because that's how the stock market works. Look at what happened today. The long bond went right through 5.3%, a relentless run unlike any I can remember, just tracking oil all the way up. The 30-year is inexorable, and it's taking things with it like a landslide.
First and most obvious are mortgage rates. Today they breached 7%. Oh man, new and existing home sales were awful. Rates were kept so low in this country that, you know, frankly, you're almost going to have to double your mortgage rate if you buy a new place. So why ever sell your old place? It's putting a lot of houses out of reach. New home buyers might not be able to afford that 7% rate. It defeats the American dream.
Housing is 10% of the economy, but it punches well above its weight. Think about how many things go into a house. Think about the materials, the wages, the brokers, the lawyers, the plumbers, the electricians, the landscaping, just the sheetrock, and the retailers from our age to Best Buy to Home Depot and Lowe's, Stanley Black & Decker. Then there's the investor. Stocks are terrific. They can make you fortunate, especially younger people who can afford to take chances. But you know what beats stocks for anyone who's 50 or older? The 30-year Treasury. The king. That's what.
Sure, inflation could go higher and you might get squeezed, but historically, it's not so bad to get a 5.3% risk-free return. Believe me, when you get older, you can still own some Nvidia and some Apple. You might like a little Chevron or a Procter, too. But that 30-year is the ultimate sleep-at-night piece of paper. Not that I know from personal experience, but lots of people tell me it's good to sleep at night. The yield on the 30-year can destroy housing, but it's an even more powerful competitor when it comes to stocks, lower-yielding stocks in a sloppy environment like this one.
Then there's the problem of too much supply. The government needs to pay for all this debt. We're lucky Uncle Sam can issue bonds to pay for it, and people still buy them because they're backed by the full faith and credit of the US government. But the level of issuance is insane. You know, there are currently about $4.5 trillion in long bonds. Right now, our Treasury Secretary wants to try to keep that interest rate down to reverse all the fallout. He says he's got the inside scoop or something. He's buying them in order to push the price up and the yield down. The problem is, Treasury is doing a $6 billion buyback when there are roughly $4.5 trillion worth of long bonds out there. Now that's too much, and he has too little firepower. Whole thing's a little silly, isn't it? Although less silly than giving every adult $5,000 so the Republicans can keep control of Congress after the midterms. That would be another trillion dollars. Mr. Treasury Secretary, saber-rattling.
So knowing all of this, let's go back to Goldman and Dave from Delta. First, we know that stocks are assets like bonds. You know that if a risk-free bond has a huge yield, then people are more likely to choose to buy that bond over a piece of an airline company in common stock, especially when airlines are notorious for being unsafe investments, or at least fickle. You price that stock off the 30-year Treasury, and right now the Treasury wins. If rates on that long bond are high, that's going to slow down the economy. Isn't that oil's so high something the president's very worried about, or he wouldn't be offering five grand for people to party with whatever. If the economy slows down, then people will be laid off and plans to expand will be scrapped. Right now, the thing that makes the economy hum and keeps stocks relatively in the air despite higher oil prices is employment, which remains pretty strong. If that were to change, then you know people won't travel as much. The airlines will cut estimates, the stocks will get hammered. That's what these stocks are anticipating.
Beyond the incredibly high price of oil that cuts steeply into the bottom line, airlines have to constantly borrow money to buy planes, which is a huge expense for them. We see Treasuries trading at 5.3%. We must always remember that very few companies have a credit rating high enough to borrow near the same rate as the federal government. Airlines are stronger than they used to be, but they're notoriously inconsistent. They have to pay well above that 5.3% to borrow the money they need to buy planes. That means they can't expand for 30 years in behaving. They can't grow. And people don't like no-growth stocks. Hence the seven multiple of Delta back then.
Now we know there are a lot of other factors that go into running an airline. We know some airlines are better than others. Delta's always been one of the best. But the bottom line, that's not the most important thing according to Disco Dave, as I called him, because I once saw him buying a boom box at 47th Street Photo. I know this because I was buying a boom box too. It was a year after my Delta fiasco, too close to the scalding. I bumped into Dave about a decade later, though, and by that point I know what I would have done if someone had given me all the confident, all-knowing answer about the PRASM and the CASM. I would have kicked him the heck out of the meeting and told him he had to wait in the hall. So I thanked him, told him so, and I added that I would have put up a giant whiteboard in the hall and made that kid write the long bond over and over and over again until the meeting drew to its conclusion. Let's go to Elizabeth in Florida. Elizabeth.
Hey Jim, I hope you're doing well.
Elizabeth, super. How about you?
Great. Not too bad. I've got this really quick question for you.
Um, I saw where you liked Howmet on September 2nd, and with the recent selloff on the news of companies vertically integrating turbine component casting in-house, do you see future revenue displacement that justifies a repricing of Howmet's moat, or is the market overreacting because demand remains supply constrained?
Now look, I'll tell you, here's the problem. And I like, we call it How I Met My Mother. We joke about it, but it's a fashion company, and it frankly is most times a very commodity-oriented business, and it happens to sell at 44 times earnings, and we don't want to pay that for commodities even though the business is strong. I think people are saying, "Wait a second, that's too much to pay, and I'm going to wait till it goes lower." And if you look at the chart, it does seem like it is going lower. Let's go ahead to Mike. Mike back in Colorado. Mike.
Dr. Cramer, giant side boo from Colorado. Longtime listener, first-time caller. Love what you do. Love the way you teach us about the inner workings of the market.
That's it. It's not easy. I got to make the classroom come alive every night. You know what I mean? But thank you for calling in.
My wife says I need professional help, so I called you. I'm also buying the book right after this call. Let's go to work. I am a Micron millionaire. I took 1.6 million at the beginning of the year in my 401k and turned it into 7.4, mostly from Micron stock. I attribute my success to your teachings, especially buy and homework. I wrote a four-page thesis on the stock showing forward PE, forward PEG, forward PEG-Y to include yield, which considers a possible dividend increase and percentage of possible $30 billion in buybacks after the chip expiration December 9th. My thesis says the share price can be 1,400 plus or minus 150 for uncertainty. My question, Professor Cramer, in the words of my cousin Vinnie, does my thesis hold water? I want to thank you for everything you do. Take it away, Dr. Cramer.
Don't call me professor. I mean, I just heard from the dean. I mean, that's a remarkable analysis. It's spot on in every single number. Every single thing you said is true, which is why my travel trust owns it and why we are buying it aggressively. And by the way, can I just say, if you listen to what Mike said, he put some money away. He was fortunate enough to have money, which I know not everybody can have, but he had money. He put it in an individual stock. Now, if he put it in an index fund, he'd make some money, but he got really rich. And part of my job is not just to get you rich, but to hopefully get you really rich. It's not a sin. It's not a sin. I was dirt poor. Let me tell you, it's better to be rich. What can I say? It's true. Let's go to Phil in North Carolina. Phil.
Jim, how are you doing today, sir?
It's a good day, Phil. Yesterday's a little hard, frankly. But we won't go into it, but today's a little better. What's going on?
That's good. I'm fair to middling today myself, Jim. But anyway, I just want to start off by telling you how much I appreciate you, and you remind me so much of Peter Lynch that I just... you are this generation's Peter Lynch.
That's... I patterned his two books before I went to write to his editor for my first book because I knew how great he was, how great he is. Magellan Fund made me and my father who we became. He's a remarkable man, and I greatly appreciate the analogy. It means a lot to me.
Yeah. That was one of the first funds that I knew of that closed.
He was getting so much activity in there. Is that right?
Yeah. You got it. And he gave a lot to BC. He's just a great man. Great man. He's made a lot of people really wealthy. So how can I help you?
Oh, he did. He did. And like I said, you are this generation.
Anyways, anyway, I just want to let you know, okay, my granddaughter and I, her name is Antonia, we were watching your interview a while ago with the CEO of Arista Networks. Okay,
Now, Antonia is a young kid who just graduated college and works in Manhattan and fell in love with her portfolio. She, on account of this interview that we heard, we both bought a lot of shares in blocks of Arista Networks. Antonia wants to know, okay, how confident are you that Arista Networks will not follow the same path as Ciena Corporation?
Okay, so let me just tell you, Arista is up a lot this year. My conference is with Jayshree. I think she's amazing, and I think every time the stock has dipped, if you've noticed it since her tenure began, you have to buy it. And I'm not backing away from that. I feel the same way I do now, the way I did, oh man, how many years ago when we first met her. She is money, and the company's fantastic. And thank you for the kind words. All right, the long bond rules everything. Remember this, you'll never be embarrassed like I was. Mad Money tonight. Lululemon just reported another dismal quarter. Talk about embarrassing. So, is there any hope left for this retailer? I'm going to take a closer look. And you called in and you stumped me on Seneca Foods. Now I'm back to give you my take when the stock's been powering higher. And how is Sterling Infrastructure holding up as the data center thesis wavers? I'm going to check in with the CEO. So stay with Cramer.
Don't miss a second of Mad Money. Follow Jim Cramer on X. Have a question? Tweet Cramer #madmentions. Send Jim an email to
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Last week, we witnessed yet another shockingly bad quarter from Lululemon Athletica. In less than 3 years, Lulu's gone from one of the greatest growth stories ever told to a thoroughly broken stock and maybe, maybe, just maybe, a broken company. It's now down over 53% year to date and down more than 80% from its peak in late 2023.
Some of this compression is because the whole athleisure category seems to have gone out of style in the post-pandemic world. Millennials used to love this stuff, but their Gen Z successors, they like their clothes baggy, like that barrel pants thing that my wife keeps telling me about. It's not just that. The athleisure category has become viciously competitive.
10 years ago there was Lululemon and not much else. Now, I mean, they're up against Alo Yoga and Vuori on the high end, Athleta, many other brands like Fabletics coming from them and from the low end. It's very hard to sell apparel at... don't forget Costco, by the way. Very hard to sell apparel at a premium price when demand is waning and your competitors are out for blood and there's excess inventory flying all over the place.
But this is a when-it-rains-it-pours situation. Three months ago, Lulu reported a simply awful quarter, stock got crushed. I told you to stay the heck away because when apparel stocks go out of style, the losses can be endless. And this one's really falling apart.
At the end of last year, Lululemon announced that its CEO would be stepping down on January 31st. Keep that date in mind, January 31st. They named two interim co-CEOs to replace him. Then in April, we learned that they would bring in a longtime Nike executive, Calvin McDonald, to run the company. But McDonald only started to work two days ago. That's right, two days ago. I mean, what the heck is that about? Basically, for the last eight months, Lulu's had no permanent leadership, and that's caused them to make a series of unforced errors.
In April, for instance, the state of Texas announced an investigation into the company for using forever chemicals. Remember those? I mean, Lulu denies it, but they haven't handled the story all that well. There was also an ugly proxy fight from founder Chip Wilson, who remains the largest shareholder. He went to war with the company very publicly and managed to snag two board seats, causing a huge mess in doing so. Really though, this team is dropping the ball left and right.
Earlier this summer, Lululemon organized a yoga festival on the Great Wall of China, but it turned into a just ridiculous fiasco because they held a performance that used a Japanese drum instead of a Chinese drum. Now, may not sound like a big deal to you, but see, the Chinese still hold a pretty big grudge over Japan's occupation during World War II. This little yoga festival set off a firestorm on social media, which was real unfortunate because China had been one of the few bright spots for Lulu. The Chinese business put up 20% same-store sales growth for the three months ending in April.
But put it all together and it was no surprise that Lulu disappointed again when it reported last week. Let's start with the results, which were technically mixed but actually quite disappointing. First, the revenue growth has totally disappeared. Lululemon same-store sales were down 9%, which is nearly twice as bad as the expected 4.5% decline. Americas comps down 12%, basically in line with expectations. But the real surprise came from their international business, down 3% year-over-year, because China mainland same-store sales declined 2% when the analysts had actually been looking for a 14.5% increase. That's the price of using a Japanese drum at a yoga festival on the Great Wall of China.
In terms of net revenues, Lulu's total company sales declined 4%, or 5% in constant currency. The Americas region actually surprised to the upside even as net revenues declined 8%, but China mainland sales missed expectations badly and the rest-of-world region missed too. On the profit lines, Lulu did much better than expected, including a monster 12% earnings beat off a $1.79 basis. However, the company didn't get much credit for it because 86 cents of that came from the tariff refunds. It's not phony, but it is funny income.
Whereas Lululemon offered putrid guidance for the current quarter. Their sales outlook implies a double-digit decline year-over-year, and they're talking about 93 to 98 cents of earnings per share. Analysts were looking for $2.40. On top of that, Lulu slashed its full-year forecast across the board, taking their sales and earnings guidance down to levels well below the street's expectations. Let's call it distinctly suboptimal guidance. That's the main reason Lulu's stock plunged more than 17% on Friday. This thing had been hanging in there pretty nicely after its post-quarter sell-off in June, but then it got obliterated again. Just obliteration after obliteration.
Now, like I said before, this was Lululemon's last quarter before the new CEO started this Tuesday. Given that setup, maybe you have to consider the idea that what we saw was a so-called kitchen-sink quarter, as in throw everything but the kitchen sink at investors. Get all the bad news out of the way so that the new leadership team led by Calvin McDonald can start to build back with the benefit of expectations that are low enough to beat. Look, I think that's a real possibility. And it doesn't hurt that LULU is now selling for just over 10 times the midpoint of this year's earnings forecast. I'm laughing because it used to be 30, 40.
But buying Lululemon because it's cheap has been a sucker's game all the way down because they keep cutting numbers. Still, if these guys can put up any kind of positive surprise, the stock would be able to rally aggressively. In other words, I think it's too risky to short this one. But I still can't be a buyer either. I haven't seen anything to make me want to feel better about the company's competitive environment in any of the markets, including the US. The athleisure category remains in the doghouse, and the competition is as crowded as ever, slashing prices, cutting margins. Now we have reputational issues from forever-chemicals accusations and no momentum at all overseas, with no real clarity as to what could get the brand back on track internationally, in mainland China, or anywhere else.
Listen, I have no ill will towards Lululemon, which I still remember is one of the great growth stocks of the previous era. I hope that new CEO Calvin McDonald can turn things around. And if he'd like, he's welcome on Mad Money any time to explain his strategy to get this once-loved brand, including from this show, back on track. But it's my job to look out for you, the viewers. And the bottom line, for the time being, I can't give you a good reason to buy Lululemon even after these stunning declines, other than the kitchen-sink thesis and the fact that the stock now appears to have a low price-earnings multiple. See, that's not good enough though. So for now, let's just say this stock is bleeding out no-man's-land. Don't try to be a hero and buy it. Just try to rubberneck and then move on. Mad Money is back after the break.
Coming up. Cramer's dug into the stock of Seneca Foods. Now he's ready to deliver his review. Next.
