Action Alerts PLUS Members Call -- February 14, 2018

Jim Cramer: Welcome to the February edition of our monthly ActionAlertsPlus.com Club Call. I'm Jim Cramer. For those who are on the phone line, no, I am not wearing an Eagles cap, although obviously I should be, as I'm still reveling in the victory. Too many of you are not Eagles fans.

Today I want to talk about portfolio management in an age of crisis, and you know what? How can I not call it that, after the declines that we've seen? I want to talk to you about how you can protect your money, as well as profit from the moment, as both must now be equally respected. Remember, you need to be aggressive at times to make money, but you also have to be protective at times, and this is one of those times where they duke each other out.

Let's start by talking about what happened to bring us to this juncture, this incredibly granular juncture where we live by the 10-year, and die by the 10-year, 2.884, minus 15 ticks. We also live and die by the VIX and its fellow travelers, which I think right now are causing a reversal of the upside verses treasuries.

I mean literally, I've done a million of these calls. This is the first time I've actually been looking at the bonds when we do this.

This club call is in part, about how the narrative can be upended, and how quickly the whole psychology of the market changed. Remember when we were talking about tax reform? Remember we were talking about rates tame, and remember when we talked about earnings? Good.

Well, all of that went out the window. So let's go over what's happening. One of the many things I have learned in 39 years of investing, is that important junctures. What happens? What we thought mattered, no longer did. And there are now a whole new set of metrics that are determining the metrics market ... Price gouging.

I tried to get my friend Jans Hatzuis from Goldman Office came to talk about this, but let's just do it here. Because I can't get any of the guys who come on to really address this stuff.

But that is exactly what happened to us, since the last time I spoke to you. What mattered back then, in what only can be described as the end of the halcyon times was, quite simply, the trajectory of earnings, and catching the most recent revisions of earnings and sales, upward, okay?

Made a ton of sense. We were, and are, in an economic expansion of some import. And during an economic expansion, you should always be on the hunt for companies that have the greatest earnings acceleration ... Keyword acceleration.

That's the theory behind many of the buys we've been making. Our buys like Waste Management, Nucor, Honeywell. These are classic beneficiaries of the economic cycle where it is, at that point. And it historically proves the biggest gains and earnings to every year.

That's what the so called "Textbook" I'm always referring to you in our bulletins, and real money suggests you do. The textbook being, what most money managers know, and read, so to speak, in the general term, about what to do here.

For those that disagree with me, or don't understand, which is completely ... Let's say it's in the ballpark, I'll point you in the direction of my first book, which is Confessions of a Street Addict.

Where I go out on my own from Goldman Sachs in 1987 to start a hedge fund. At the time, one of the first to do so, believe it or not. And I started out by buying the stocks of all my favorite companies, of that particular era.

Like Heinz ... Now we have Kraft Heinz. Like Johnson and Johnson, stock's been down really badly. And Syntax, no longer independent. And Merck stock's been down a hard of late. And I began, in 1987, to lose money hand over fist with those stocks, and their ilk.

You know I had a clause in my fund agreement, that said if the fund had declined ten percent, I would have to send a bulletin out, advising that anyone who wanted to, any limited partner, could get their money back. That was some provision that most people didn't have.

Frankly it was more of a hedge fund death sentence. So when I got to minus nine percent with those stocks, including Kimberly Clark, and Proctor, I sold everything. And I studied intently what had gone wrong. What I had done wrong.

It turns out that we were in the hottest part of an economic expansion, that started during the Regan Administration. The part of the expansion where anyone cared about, was how much the companies trounced the estimates by.

Of course, the companies I'm investing in, were classically economically insensitive stocks. Where they would do well no matter what. I recall that at the time, Japan was very much the ascendance, and they were taking market share in everything from cars, to steels, to technology.

I had always thought more about that than anything else. So I was buying Heinz, because I could not imagine a situation where there would be Mitsubishi Ketchup on our dining room table.

Needless to say, that kind of sales spiel is fine, if you're recommending stocks to wealthy individuals and small institutions, as I was at Goldman Sachs. But it is not okay if you are in the performance business.

Remember, most of the people I worked for were very rich. And you only need to get rich once. So I was always suggesting that people buy stocks like Heinz, as well as municipal bonds, which yielded a heck of a lot more than they do now.

But when I got into the competitive money management business, I couldn't just sit there with my phase from a different era. I had to play the game. And that meant selling all these kinds of stocks that had done so well for me, and buying companies like PPG, and Caterpillar, Alcoa, International Paper, Dow Chemical.

Stocks that had been an anathema to me, because their volatility, and their endless revisions downward, when the economy was weaker. So as I surveyed the landscape back then, and looked at all the stocks that were winning, and those that were losing, using my trusty weekly chart books from S&P, now it's all online, I still get it.

The playbook became pretty darned obvious. The companies with the biggest earnings gains year every year, were winning, no matter how repulsive those companies were. And I thought they were. So you had to close your eyes, and hold your nose, and buy Bethlehem Steel, now bankrupt, Amax went bankrupt.

Two of the worst cyclicals imaginable ... Some at Phelps Dodge were pretty good, because they were going to shoot the lights out, versus the previous year reports.

So that's exactly what I did. And for the next four months, I built our capital back, and then some. I never forgot that when the economy heats up, you have to heat up with it, and choose your stocks with that bend.

Now, after I got back to even, by day trading, frankly, I proceeded to invest in the best of the cyclicals I could find. But then I toured technology stocks with the most oomph. Back then it was Texas Instruments, and Intel.

And the financials ... By the way, Intel was barely in the top ten systemic back then, because of Japan. And the financials were mostly leading to an economic recovery. And that included Nations Bank, First Union, and Fannie Mae ... Talk about dating myself, Fannie Mae.

I had a good run, until I thought the market had just gone up, and up, and up. To where I decided personally, it was too dangerous to own as much stock as I did. And I decided to sell many shares in each of those holdings. I ended up selling all of them during one of the most disastrous weeks in market history, which happened to be the week before the week of the crash of '87.

I was in cash for the crash, except for some J&J puts that had been used to protect the longtime J&J position. And in large part, because those, in some day trading until the end of the year, I finished up nicely in '87.

It was a brutal lesson though, because nothing was as good as those weeks in early September, leading up to the crash. But I was a firm believer in the theory that bulls make money, bears make money, and hogs get slaughtered.

I knew even though there was nothing wrong ... Maybe because there was nothing wrong on the horizon, that I could see, and it all seemed too good to be true, that it was time to take money off the table.

Of course the club is not about how to run a hedge fund. Heaven forbid if I had to do that, it requires you every minute, quitting your job, and just looking at stocks. The club is about how to pick stocks.

And which stocks are good for you? And club members learning the process of managing your own money. It's about empowerment, it's about education. The first months of January this year, felt very much like those months when I started my hedge fund.

You could see all the money going into the cyclicals, at least this time, of higher quality. Including the ones that we had purchased. But going to the first week of February, I thought, "Enough is enough, okay? This could be like '87, so let's take some winners off the table."

Now, lots of you have asked how I knew to do it. And all I can say is, that I learned when the circumstances warranted it. Now, I also didn't think, and don't think that we are in a 1987 year, but I felt the froth, and I had to take action.

But I will say, is that the market has left behind the metric that mattered. The biggest earnings piece. And it's now trading off two other concerns. Inflation, hence why I am looking at the 10-year, and therefore, the bond market.

Beginning with the employment number at the start of February, we saw a huge seachange. Where we realized that, at last, there was some wage inflation, as meager as it was, frankly. We also recognized the foreign point was pretty much upon us, at exactly the same time that the federal government decides to subsidize, to have more hiring.

Suddenly interest rates, which had been so tame, exploded higher. We're still paying the price of that, okay? And at the same time, the stocks that had the biggest earnings beats got hit. And any interest rate sensitive stocks like the utilities, the real estate investment, trust ... Also, by the way that the preferred got smashed.

Right on top of that, we've got something that is eerily like what did happen in '87. A tail of the VIX, and its derivates, the wag of the dog, today's no different. Even though the interest rates are up 15 ticks, ago? We like to say that the bonds are down 15 ticks, but you get the picture of rates going up.

We have the VIX collapsing minus five, to a 19 basis. We have ... Of the things I've been telling you to look at, the VXX down three and a half. The UVXY down three. These are monumental moves, and the one that I've really focused on, the TVIX, wow. Down 1.43. Isn't that incredible? It's a reversal of everything.

Now let's go back into '87. Back then people ensured their portfolios, with a product called Dynamic Hedging. Somehow, as the market went down, the firms that sold this garbage to you, were supposed to be protecting you from the downside. It didn't work, because the futures they used to hedge your stock portfolio overwhelmed the entire stock market and sent everything down, much faster than the futures could possibly be accounted for.

There was just no one answering the phone, okay? And that meant the futures go down, the stocks went down more, and you were trying to ensure the stocks, they couldn't do it. And the people who did portfolio insurance lost a fortune, and the people who wrote portfolio insurance pretty much went bankrupt.

Okay, this time the VIX futures, and the options on them, proved to be the straw that broke the proverbial camel's back. No two selloffs are alike. This one involved hundreds of billions of dollars. A lot of people misinterpret that and say, 1.4 billion too, but that's wrong. Some people say 1.4 trillion. I'm not even disagreeing that it could be that high.

But it involved hundreds of billions of dollars that were long the S&P 500, and short the VIX, were any of these VIX instruments as a hedge, in various forms, using options and comment, and futures.

The strategy had worked, because the market was so placid. You could sell calls against the VIX, and just use the time value of money that just make a lot of money.

But when rates shifted, the placidity left. Replaced by incredible turmoil, which spiked the VIX, and corollary instruments, the ones that I just read, and ended what had been a fabulous gambit that had made money for 16 straight months. It left us with the market we have now.

Where we are scared with every tick up in the VIX, fortunately it's not going that way. And of course, the bond market quite different. The bond market is doing quite poorly today, but people are overlooking it, because of the collapse of the VIX.

Now people keep asking me, "What will change the situation back to the way it was?" I think that what will happen is, that if rates go down, we're gonna have a rip snorting rally, because we are finally oversold. We got oversold on Monday, in the S&P 500 oscillator I used from ... But it's from the S&P. There's a division that you can buy ... I refer to it a lot, but you can buy weekly charts. You can buy an oscillator, and it's the S&P company that issues it.

Now, the 10-year, which is a 2.891 right now, literally ticks 2.9. I think we are still stuck with scourge of the VIX, because they haven't changed the rules, or the margin requirements. So I believe 2.9, and we're really close, the market will reverse today, and go down.

And that's the downside scenario. And it is pretty amazing that we have to be so granular to keep up with this kind of market. And, obviously it bugs me ... Geez, we're down 18 ticks. Obviously we're on the verge of, even while I do this conference call, perhaps having a serious reversal. It hasn't happened yet. Led by the NASDAQ, by the way.

Now we are not at a level, where we can withstand a 2.92 10-year, because there's still plenty of stocks barely off their highs after this particular rally. But we aren't at a level that is like the week before the crash in '87.

Because back then, the prices were jacked up by the Japanese, was at 29. The Japanese used to come in every morning, and control the pricing. Now they're at 17 and change after the selloff, some would say 18, and interest rates are, indeed, even though they are ticking up as I talk ... As I talk, they are still much more calm than back then.

Now that's the big reason why we started to put the money back to work, that we had taken off the week before. The money where I had said, "Listen, bulls make money, bears make money, hogs get slaughtered." We had taken that off, and we reapplied, but to different stocks.

We put some money in Honeywell, we put some money in Nordstrom, and Abbot, and Constellation, Cimarex, Lily, and this morning, Goldman Sachs. We chose these, because with the exception of Waste and Abbot, they helped our basis, and you know how much we like the discipline of not violating our basis.

Excuse me for constantly having to check the 10-year, but that is the world that we're in. The word "Discipline" is key in that sentence. Discipline. Because if you were going to preserve capital for the right moments, you're going to have to be extremely disciplined in your buys, and your sells.

Let's take a real life example. Case in point, First Data. Do you know, we decided going into 2018, that we were no longer going to tolerate companies of stocks that missed quarters. We identified Apache, Arconic, Alphabet, and First Data, as stocks that we wanted to trim aggressively, or sell into strength, and that's exactly what we did.

We also felt, in more portfolio, discipline. That we had to sell some Facebook, because it had gotten too big. Yes, literally, gotten too big, because it had done so well. We had to cut back on some DXC, hit the price target, on Activision, because it had hit the near term price target.

My only regret, is that I had said, "Keep Allergen on an even tighter leash, the stock of Allergen, AGN. But then when it reported a pretty good quarter, it got slaughtered anyway. Not something I anticipated. I do feel we're a bit snake bit in the position, and have not chosen even bigger down here, having not sold when it rallied, and not bought any when it got hit.

Believe me, it's tempting to blow out of some, up four today, after being down three earlier this morning. But we still believe a better time to sell awaits. You know, in the old days, with the hedge fund, when I was working with Karen Cramer. Do you know what I would do? I literally would sell a hundred shares right now. We called it throwing the maiden into the volcano.

Because we believed that if you sold some, it would go up. And literally, like when I wore my dad's jacket to the Eagles game, at the Super Bowl in Minnesota, that somehow we would influence things, by knocking things down. By the way, the stock market has just gone into a tizzy, and come down. Why? Because of exactly what I said, rates have gone up so much just now, while I've been doing the call. So we have to be very granular, and very focused, and very disciplined.

What are we doing? Our plan is to keep upgrading the portfolio, by selling some of the stocks that we don't care for, that get lifted in oversold rallies, FDC. And then, when we get hammered, we go over the bullpen names, that I will look at, and tell you about in a second.

So we're prepared. So, we're prepared for a down one thousand day. When everyone else is puking out stocks, we've got our list made during a calmer time. When we could sit back and say, "We've gotta be battle ready, so let's talk about the new buys." Let's talk about Raytheon, let's talk about Nordstrom, let's talk about today's buy. Goldman Sachs, which we may have to buy more of, if the stock market keeps going down, as I think it will, okay?

One of the overarching themes behind the running bonds, is the huge amount of treasury supply that is going to hit the ball market because of the gigantic deficit, at a time when the fed is no longer buying bonds. Okay?

I totally understand why rates could jump just on that alone. Because we have seen that happen plenty of times before, in so many different bond auctions that I've been involved in. When President Trump presents a $4 trillion budget, with a huge amount of debt attached, courtesy of the reductions in taxes, the thesis is a painful one for stocks.

Because interest rates could drive us down. Interest rates, to VIX, to the market. Let me check rates for a second. Here we go. We're at that key level. Now this is going to keep us having a decent size of cash, okay?

We're gonna reduce it a little into the selloff, but it's also drawn us to our first new buy, which is Raytheon. Let's talk about it. It's the premier antimissile maker, that has had such incredible fortune in making and selling advanced weapon systems.

After the company reported an excellent fourth quarter at the end of January, we feared that we missed our chance on this name. But when volatility reared its ugly head, as it's doing now, well, that was our chance. That was last Monday. We jumped on the opportunity, getting shares five percent off its highs. I know, not that much. I like five to eight, but you can't be greedy.

This is the perfect example of how to use volatility to your advantage. Or, as our general approach during trying times, and to pick high quality companies, who reported excellent numbers, but are now trading at a market discount too, when it reported those excellent numbers.

And we know this was high quality. Why? Because Raytheon told us that business was performing incredibly well, just before the market selloff. Rather remarkable, the timing for us.

Now, whether you agree or disagree, defense spending is on the rise under the current administration. The republicans love to spend more on military. We did not near to hear the State of the Union address, where President Trump called on the need for more military spending. And we did not need to read the new budget deal that featured an $80 billion increase in spend for fiscal 2019, to understand this thesis.

These trends keep Raytheon's business growing, which is great for shareholders. And while defense spending in the US is very important to Raytheon, this is much more than a US defense spending story.

Approximately 32 percent of the company's revenues come from international sales. And that's spiking, by the way. Raytheon is seeing plenty of demand across Europe, Asia, Pacific, and the Middle East. And North Africa. Worldwide, Raytheon plays a role in deterrents.

Meaning that countries use Raytheon's integrated air and missile defense capabilities, to prevent outside threats. If you need any indication of how the stock's doing during these times of geopolitical tension, go back to the charts, and see how Raytheon performed last August, when threats were on the rise.

Raytheon's key product is its patriot air and missile defense system. That has been very popular in Europe. For example, Romania's signed their agreement with the US ... Romania, for a letter of acceptance, that procures the patriot system.

Imagine, they believe that this deal alone could end up being worth $2 billion dollars. Poland is close to finalizing a deal, and in its entirety could be worth between four and five billion dollars to Raytheon. Sweden is expected to sign an Norway in mid 2018. Raytheon sees a billion dollar opportunity there.

Taking a broader view, NATO countries are obligated to meet a minimum defense spend of two percent of their GDP. And we expect Raytheon to take a chunk of the business in the countries who have yet to meet their levels.

Now, these deals mentioned are far more than just the paycheck. But you can see that Raytheon has plenty of opportunity, plenty. Lastly, Raytheon is a big beneficiary of the reduction on corporate tax rate. Could be paid nearly a 30 percent tax rate in 2017, and management expects this will fall to about 19 percent in 2018.

I know one way Raytheon could reward shareholders, is with a lower tax bill. Why not increase shareholder returns, and boost that dividend and buyback program? It's been just a complete horse, bare with me. Raytheon doing about a buck sixty.

All in all, this is a name we like, because the company has some of the best products, and technology in defense. An industry where spending is on the rise, both at home, and abroad. To put it this way, Raytheon ended 2017 with a perfect backlog of 38.2 billion. That's up 1.5 billion from the previous years result.

Also Raytheon is, as I mentioned, a win to the tax club, getting this below 200 was an absolute steal. It's at 211 right now. I think this defense contract, among all, has the best chance to be able to take worldwide share. We want to be bigger in RTN.

Now last Tuesday, during that distorted open, where we put some good cash to work, and some of the lowest levels we'd have seen. We called up Nordstrom from the bullpen, JWN. We doubled down on the name quickly after we learned from many luxury retailers ... By the way, Fossil, this morning, on their hind, that sales were doing well.

So we were already fairly big in Nordstrom after repeated purchases. The story here, better earnings, a stock we can play catch up to Kohl's, with a good off price business. The rack, and a gigantic new, New York store that's opening this year. That I think can move the needle for the entire chain.

Currently, only Rack is very exciting in New York City. I think this store is going to be a destination for foreigners. Not unlike Macy's at Herald Square. Most importantly, we added Nordstrom, because we think that the company's earnings will improve.

Back in January, the company pre announced a positive scenes for a sales increase, for the crucial November December months. Doubling expectations of a half a percent rise by achieving positive 1.2. that's underachieving from Nordstrom, I know, and what I think they can do, ultimately.

Now of course, we would have liked to have gotten it before this, but thanks to the market selloff, the gains from the surprise have been washed out. They haven't for Kohl's. Had they been in the 50's for Kohl's, we would've been tempted.

What else has boosted our expectations? Better sales. In the last few weeks, several luxury goods where companies reported strong earnings. We got those numbers from Michael Kors. By the way, on the Fossil call, they also said that Michael Kors is selling well. That's high end.

Their hand bags are doing well, footwear's selling well at Nordstrom's. We've got a fantastic number from Estee Lauder, what an amazing stock that's been. That's a big makeup and skincare vendor at Nordstrom. Lululemon reported a terrific number, and we know this because the stock has held up, despite the CEO resigning.

Tapestry, that's the owner of Coach, Kate Spade New York, Stuart Weitzman. They posted much better in expected earnings too. Our point, we think that the strength of Nordstrom's vendors is a strong indicator that Nordstrom is performing well, too.

We covered luxury goods, but Nordstrom also appeals to the discount shopper through that Rack. I like Rack, it's about a mile from my house. We think that the trends here can improve as the business plays catch up to Kohl's. The company got knocked last quarter after Rack posted a poor result, for having too much inventory in management's overaggressive sales plan. Funny, isn't it?

That now we see from the CPI this morning, that there's not enough inventory, and prices are rising. Maybe will get lucky in that inventory, but will have to market down. These mistakes have been corrected. They've tightened things.

We learned this when the company made that pre announcement, as management said, in the Nordstrom Rack brand, and NordstromRack.com ...Which is a similar concept, but member only shipping website, that sales increased 8.2 percent, and capital sales increased 2.9 percent.

So we can see that management took the right steps to improve the result on a sequential basis. This could be the beginning of a turn around in the business.

Next point, the new Flagship location in New York. This palace, which is gonna be around Time Warner, this palace consisted of two separate plans. The 47 thousand square foot men's store, which opens this spring, and the 320 thousand square foot women's store, which will open in the Fall of 2019. I wish they could speed that up.

They're opening in stages, because the men's store will be located in existing space, the women's store will be newly built. Nonetheless, this is Nordstrom's first full line New York City store, and the company clearly wants this project to make an imprint in the New York City scene.

It's going to be ultra modern, with digital infrastructure, making it as personalized an experience as it can be. Estee Lauder is talking about personalization, Nike is talking about personalization. Under Armour, yesterday, when I talked to Kevin Pint, personalization.

Nordstrom wants these new stores to turn into the go to destination for New York City shopping, and I am talking about locals and tourists alike. By the way, with a stronger euro, it's gonna be fabulous.

And this goes without saying, but any store where the catalysts are out into the future, we also look for the dividend to pay us for our patients. Current share yield about tree percent, that's pretty good income there.

Don't forget that Nordstrom was just debating not that long ago, the notion of going private. When retail wasn't anywhere as good as it is now, but it's stock's unchanged from where it talked about that. That's a compelling set of statistics for any company.

Now last October, the family suspended efforts to go private, they're worried about financing. In an era now, when Broadcom, he had a hundred billion dollars at the drop of a hat, to be able to buy Qualcomm, let me just say that I think the conversation to take the company private will be in the forefront in the spring.

We haven't learned of any new information about restarted talks, but that is where we are today. How's the stock doing? Oh, up above 50 dollars. And that brings us to our newest name, which is Goldman Sachs. Which we bought this very morning, based in large part because of the volatility.

Let me explain. We have said we like the financials over and over and over again, because they're an inexpensive group. The top ones are 14 times the earnings, with the market invariable at 17 or 18 timeshare earnings. They are an inexpensive group that will benefit from the rising interest rate environment we find ourselves in.

We've added terrific position, and a fabulous run, by the way, in city group on our books. And that represents a value play, at a bank that plenty of capital tucked away, can be returned to shareholders, if the fed lightens up on regulations.

Michael Kors has told me over and over again, he's become someone I talk to on a regular basis. They can buy seven percent of the stock back year after year, how about that? JP Morgan, we've got the bank with the best earnings power, we got that exclusive interview line with Jamie Dimon the other day, simply because I wanted to know how, at a time of such turmoil, they can raise a hundred million. He said, "No problem."

JP Morgan's fortress balance sheet, the bank is the largest one in the US by total assets. It hasn't come in. It's driving me crazy. Looking up a buck and a half today. How much we wish we could buy more. And we do tell you when you can buy more, we've been restricted in JP Morgan forever.

All right, Goldman Sachs gives us a different flavor financial. Goldman, where I worked at in the 80's, is now a value play, in an already cheap sector. Because the stock trades at a lower tangible book value compared to most of its peers. That's incredible. That means if you close the doors, and just gave the money back, it's cheaper than almost everyone.

We think that one of Goldman's biggest revenue generators is trading business, is prime for turnaround. I didn't hear anything different yesterday when Lloyd Blankfein spoke. No we didn't tell you, point blank, that the big divisions that have been lagging are hurting anymore, but come on. Goldman's institutional clients serves its business where I worked. Essentially the trading business, had a horrible 2017.

Fourth quarter sales fell 34 percent ever year. 24 percent compared to the previous three months. Boy, is that horrible sequentially. Remember the reason why it didn't have a good last quarter? No volatility.

Well, there goes that negative. I mean, right? I think that the company will have the first really good quarter in quite a bit, and the stock could soar. And I'm not talking about going up three points, that's child's play.

2017 was basically an a nominally, and in the market of very few bumps, hence why everyone was short with the VIX. When I say "Everyone" meaning the so called cognizant that always blows up in crucial moments.

The start of 2018 has been vastly different, and I expect that Goldman's trading a part of its operation, has greatly profited from this market swoon. And the well services, the client well services, I think is going to obviously ... People call, "What do we do?" That's good for my old division.

In any case, CFO Marty Chavez, who I've gotten to know, tells us not to fret over the low volatility, low activity environment. He said, and I quote, "There are a number of positive tailwinds that could drive client engagement in a more expansive opportunity." Oh I love that, right?

He then added, "Higher interest rates, and more active central banks often correlate with higher client activity." Well that sounds like a called action to me. Chavez is really smart. He wouldn't be saying these things idly.

So when we set an alert this morning, when the market was down badly, on how we were putting a small amount on, and we were watching this name like a hawk, to add more, you gotta be ready. The company has a lot going for it.

My old friend, Lloyd Blankfein, he started a little bit before I did. Spoke at this conference yesterday that I mentioned. He was detailing his plans on how the bank will generate more revenue, and I think the concerns from last quarter will prove to be trough as a side.

I find it ironic, that Blankfein's implying there's too much stimulus, at the same time that his former top gun, and old friend of mine, Gary Cohn, pours gas on the Kingsford economy.

I would look for us to buy more, if there is a further dip, but I fully expect that there might be. Now, when I mention that these guys are my friends, in the beginning of Mad Money, we often talk about, it's not about friends, it's about money. And it is.

But when you work at a firm, and you develop friends, what are you gonna do? Tell them, "Listen, it's not about friends. I don't wanna talk to you anymore." I like talking to them. Gary, I've not spoken to other than on TV, since he became the economic advisor. Disappointing to me, what can you do?

Now during this period of volatility, we've made several updates to the bullpen. At the end of 2017, we told the club that one of our many goals for the new year, was to provide more updates to this list, because we know, we're interacting, we know you want them. And we hope this has helped you stay on top of our thinking. We answer what you want.

First off, I would love to add even more retail. But only after we've really gone down a tad more. So which intrigues me? It's actually a restaurant chain, what I've been talking to, and I've got a pretty good read on. Which is Darden.

And I'll just give you an up to date of how hard this is, okay? Darden is at 95. It's only five points from its high. It's down .52 percent for the year. Darden is the parent of Olive Garden and some other smaller chains, by the way, which are doing well.

And Olive Garden's doing incredibly well. It had a terrific quarter, which is why we added it to the bullpen. Hoping that the stock would get hammered ... I recently met with management, came away with a view that they have a multi runway, with some big concepts that will work away from Olive Garden. I like that.

They also bought a company that they can so called Darden-ize, which will be terrific. Now here's one that we'd been talking about in bulletins, we are trying to get some Amazon on the sheets after recent pullback.

Did we catch it at the 500? No. I mean, but would've, could've, should've, right, people? The stock story has gotten much better in recent months. It's now hitting on advertising web services and retail cylinders. I think it's as cheap as i have seen it, given that conflict.

We are currently inclined to sell some Alphabet, big gain there, to finance the purchase. I know that is radical, but you have to admit, that Alphabet simply has gotten too smug, too arrogant, too chest beating, at a time when so many companies are crushing the numbers.

And by the way, they could crush the numbers. They just don't seem to be inclined, which is why the stock got hit so hard after the deported. We are also looking for derivative eCommerce plays. We've come up with Federal Express, XPO Logistics, remember that one on the shipping side? WestRock on the box side.

WestRock, because I did this with Mad Money recently. We know that you like the tie ins. West Rock is consolidating the corrugated box industry, what my father used to be a salesman for. So important for the shippers.

Remember, what does your FedEx Delivery, and XPO Logistics Delivery, and the Amazon Delivery, what are they from? What's UPS from? It's corrugated boxes. It's a great correlation.

And by the way, XPO should be ... You should be familiar with. We get a rare trade, okay? Like Western Digital, we knew it would be a trade. We put it on, we were focused on a quick move, and that's exactly what we got. I didn't think it was gonna be on takeover talk, I thought it would be on earnings.

Now I know that we got Raytheon, but currently all defense contractors are working. So we wouldn't mind buying another. We like Lockheed Martin, LMT, because of the joint strike fighter, among other programs. And it jumps out as value.

If the market gets crushed, we will be there, with Lockheed Martin. Remember what I said, we have to be there with stocks, and pick them now. So if it gets there, boom, we are ready to issue a recommendation, perhaps buy some if we haven't talked about it.

And that's the secret to volatility. The secret to buying Lockheed. Now, it's also the secret to buying either Visa or MasterCard. Which are fabulous bets of the continuum movement from paper to plastic, worldwide.

I read a piece yesterday about the top of credit cards. That's never been the case. We are more partial to MasterCard, by the way. Better growth in them anyways, more of a play on world commerce.

We have one stock in the bullpen for, if we sense any downshift in the economy, which a lot of people feel has to happen if rates go up, and the feds raises rates, and raises rate. Four times to tame inflation, because they're worried about the inflation that perhaps is in housing. Very hard for the fed to raise rates, and control food cost. Very hard for them to control clothing cost.

Which, other than healthcare, they can't control healthcare either. We sense any downshift in the economy, it's United Health. They would be the principle beneficiary of a slowdown. Now we have had a couple of other financials that refuse to come down. Driving me crazy, here we go, PNC. How could it be at 155? This thing is driving me crazy, but it did have an amazing quarter.

Okay, PNC is five points off its high, but it's up eight percent. I gotta wait until it comes in. How about this one? Valley National Corporation. Now Valley National is a super regional. And what is it really, for me? It's about bank. I've done a lot of work with them.

Now PNC, like I said, have the best financials. And second to the company is Valley National, is a jersey bank that's making a bold move into Florida, after buying a bunch of banks in Jersey. They've made a huge purchase in Florida they're not getting any credit for it, and higher rates translates directly into earnings, strictly from its new Florida branches.

It is a little small for us, okay? But you ask what we talk about. What do Zev, and Jeff, and I talk about. And you're familiar with them, because you go onto our webpages. You know what we're about, and they're gonna be doing more and more videos, it'll be very exciting, late afternoon.

We all talk about how we gotta be very careful with size. We don't wanna move a stock so much, and then we all get lousy reports, so to speak.

Now we've got a couple of other wishlist names, mostly technology. Now the first reports tonight, we're gonna be all over the supply materials. If we get a situation where there's tremendous turmoil, if it reports a good number, it might be worth grabbing.

Next is Flex, I know you're tired of it. It's on the bullpen, it's Flextronics. Manufacturers for all things tech. Whether it be medical, computer, or even clothing related. They are Nike's manufacturer. And it's so important to have a quick turn. And Nike is personalizing, Flex is the reason.

Then what another one, that might be familiar to people that have been with us for some time, not the people who just joined us, is Adobe. Oh, we had a huge gain, so we took it off the table. But in all subsequent meetings with the company, I've come to believe that is even more important to eCommerce right now, than it was when we sold it.

It's the backbone of all sorts of commercial transactions, and commercial creative strategies that are just very exciting. With interest rates now, 19 ticks, holy cow. I think Adobe can come down, it's only up a dollar something more before.

But you know what? While we're granular, we're not gonna bite on the first decline. Now, I met recently spent a ton of time with 3M, when I was in Minnesota for the Superbowl. And I think this company, which is literally producing a gigantic chunk of its profits from new products developed in the last five years, that stock almost never comes in.

It will take a huge rate shift, a 2.92 ... I like saying that because it's such a small shift, for those that have been around, before we get another down thousand day. And that's when you buy 3M.

I like being in sync with companies that I've just pulled up with, and given an important current business conditions matter. We are ready with 3M. I detail these bullpen names, because if we want to take advantage of the more vicious declines, we have to be ready. We don't want to say, "Wow, it's down, what are we looking at? What do we do?" Because we sure don't want to surprise you.

You have told us over and over again, you don't like that. We want you to get comfortable with stocks that will intrigue you, as part of being a club member. And we allow you to be free, to pick and choose. That's what the club is about. We just want to show you the thinking behind it, you've gotta get comfortable.

Again, we do think that as long as the bond prices and inflation gauges, we can't go back to the Halcyon days of no volatility. They're in the past, people. Plus the bond market vigilantes, are those who demand higher yields to take on the supply risk of a big deficit, and the fed financing, and the fact that ... I mean, the government financing in fact that the fed's not buying.

The new VIX vigilantes, who want to break those who were short to VIX, or calls on the VIX, or calls on the futures. These are things that we have to pay attention to.

Now, during these volatile times where we have experienced wild swings and trading, we hope that the frameworks and guidance we have provided you in the club, have helped put you ... Understand, give you a little stability for your portfolio, in an unstable period.

Each day our team here always comes together, usually before 7:00, to point out the specific stocks we view as most attractive, duke it out over the rank ... We just had one the other day where it's like, "Should we upgrade Activision Blizzard?" It was down to 66.

We look at these things in a granular fashion. We're always all over it, and we strive to articulate that message in our post mortem wrap ups, to help you prepare for the next opening belt with a clear head, and a clear mind.

Discipline in portfolio management are the two things that will help us navigate these stormy waters in the market, and we hope these bulletins help show what we would do, even when we can't. So stay close.

We'll be ready in this new environment to lighten up, or get out of the marginal positions, even at a loss, because we can't risk not having enough capital to be ready for the next down one thousand point move, whenever it occurs.

Okay, I'm looking at Allergen. It's up four and change on a day when the drugs are actually going down, very intriguing. All right, so let's get some questions. Remember, it is interactive.

Here's one from Robert N Morton from Grove, Illinois.

What is the Action Alerts Plus approach to risk management? And how do you keep positions on a tight leash as I mentioned?

Okay, tight leash is basically, if the quarters blow up, we are not gonna stand there. I mean, we saw FDC's quarter yesterday, we knew we had an up opening. FDC has not done what we wanted, we blew it out, we saved a lot of money. A tight leash means, if we see anything wrong, we go.

It also means that we're unwilling to just sit there and take a beating. But we've taken a beating in GE, we've taken a beating in Allergen, and that's on our bad. GE, I was hoping John Flannery would get it together faster than he has, but he was dealt a really bad hand.

Allergen, what can I say? I have been all over Brent Saunders, "Do it, do it, do it." The Botox franchise is very strong, nobody cares. They care about the migraines? Not at all, even though it got a big approval.

So Allergen's in the doghouse of the market. But we've got to accept the fact that it had a better quarter, and it's now the cheapest stock of all drug stocks. We don't want it to get the three percent yield, because it went down.

They did lose the dividend, but not enough. They keep making mistake after mistake. Particularly that weirdo thing they did with the Mohawk, to try to prevent one of the key products, with the big gross margins, from losing its patent. That was silly. Silly is being rewarded with punishment.

All right, what are you expecting from Constellation Brands going forward? Bob E from Idaho.

Now, those of you who've watched the show know that we have Rob Sands on constantly. This morning there was a story about a potential successor to Rob, but Rob immediately said he's gonna remain CEO. It's Bill Newlands, he is the President and COO.

We don't want to lose Rob. I admit, we don't want to lose Rob. My case on constellation brands has went down a lot on that last quarter, because of wine sales. But this is a play on Modello, and Corona, and Pacifico ... Pacifico bestseller at Bar San Miguel, my small plate Mexican bar.

What matters to me is that he said "Wine's gonna bounce back." Rob Sands, if he says wine's gonna bounce back, it's gonna bounce back. So we've been buying the stock.

All right, there are a lot of industrials in the portfolio. General Electric, Honeywell, Illinois Tool Works, Nucor, Raytheon. Do you have a preferred name? All right, this is a great question.

By the way, Arconic, we went over that today. Do we sell Arconic at 25? That was not a good quarter. Or do we cite the fact that the previous interim CEO just bought a huge amount of stock? Or do we accept the fact that the new CEO, Chip Blankenship, who is from the industry that's most important, Aerospace, will fix the most important vision. They bought this for far more than it should've, that was the previous CEO.

Just simply doing a bad job. But of these names, now that Raytheon has soared since we bought it, I'm gonna come back to Honeywell, Darius doing a redo of what Dave, even though he moved away, he was my neighbor for a long time. He's moved because he's no longer the CEO.

If he's not willing to settle with the hand that he got from Cote, he wants to augment the hand. Honeywell, not up today. Down 40 cents. Is that the opportunity? I will tell you yes. That's my favorite one, okay?

Remember, interest rates, taking it 29, they have to send this market down. We are ready. 29 right here, should translate into a declining market. We are ready. Thank you, Bud Harrison, for that question.

All right, what is the plan with the EZU position? Asks Karen from Miami, Florida. My wife wants to buy some property down in Florida, but be slow. We're gonna look into the Sanibel side, the west side. Any suggestions, please give them on the board.

EZU is at 43.7, we've got a gain. What is the story with EZU? We are expecting that Mario Draghi will have to raise rates. By the way, one of the reasons why I don't think that the rates are going to turn into abomination, is that the 10-year here is so much better than the 10-year there.

But they're trying to break the tenure right now, the bond vigilantes. They want that to go to three. Up 29, it's not stopping. Now 20 ticks, holy cow, we're gonna have to deal with a down day later today, if that continues.

The EZU is strictly, Karen, a position on, they have to raise rates, and that will be great. No it's not, it's all industrials. Well they said, "How does an industrial benefit?" Well, money will fly into Europe. And they raise rates, that's a sign the economy's better. They have to do it, here comes the decline.

But the stock market's declined rather badly since we started, because of what I said. We started with 16 ticks, we're done 20 ticks. We're 2.902. Again, need to be granular. Tight leash, all right?

With the news ... Number five, with the news that FTC is opening an antitrust investigation to both Patterson and Henry Shine, how do you think that affects Dan Hearst Dental Unit? That's from JC ... M Tucker from Georgia.

Man, I gotta tell you, we've got the smartest club members. I immediately, when I saw the news, said, "Is that Danaher?" It's not Danaher. This is something, a particular product line, that Henrys Schein apparently ... Look, we don't know, we have to wait for the FTV investigation.

Stanley Bergman comes on constantly, on Mad Money. I didn't know there would be some sort of, what amounts to price fixing. Let's hear what the company's say. But I think that Henry Schein's in the penalty box, Patterson Dental's in the penalty box. And I wish the boys who run Danaher would sell that darn unit. Because then the stock would go to a hundred.

I also think that they should buy someone. Maybe they're waiting for the market to settle down. Good luck with that.

All right, six. Prior to the big selloff you wisely recommended trimming Facebook and Alphabet. Now that those have dropped considerably, would you consider repurchasing some of those positions? Maury K Windsor, Ontario, Canada.

No. They're not down enough. I mean Facebook, geez. We're got an unbelievable basis and not tinkering. As I mentioned at the top, Alphabet, we want to trim. We've got a big game. I didn't like what they started with, but we had a great quarter.

No, the market will decide whether you have a great quarter. And they missed the numbers, the Dow's down 70 points now since we started.

All right. So my take is, no. We're not a buyer of Alphabet. We would be a buyer of Amazon, which refuses to come in. But just you wait. When this market ... With these bonds where they are, we're gonna get Amazon at a cheap price. May have to wait until next week.

Number seven, market exports are saying that if the 10-year treasury goes past three percent, the stock market will be impacted negatively. I remember many of the 1990 years were well above three percent. What is the difference this time? By Suzanne E.

Okay, a couple things. One is, the stock market is going up incredibly, so people are anxious to try to take profits. The second is that a lot of people feel that this whole move was done because of the fed. And then you overlay the fact that the Trump Administration pushed hard to be able to cut corporate tax rates.

I'm not saying this is nonsense. I am saying that we have to be cognizant of pricing of our stocks, and that means we have to be cognizant of the tenure. Regardless, I'm with you Suzanne. I'm with you in saying, ultimately, this is kind of nuts.

But you know what? If the Dow has moved down a hundred points since we started ... If S&P has declined rather radically, who am I to say, "Ignore that man behind the curtain." Because the man's not behind the curtain. We're ready for action, VIX spiking here. Holy cow, I feel like I'm giving you a play by play. Hopefully it's gonna be like the last two minutes of the Eagles game, of the Superbowl.

Number eight, regarding the oil market, how quickly can sentiment change, causing prices to move either lower, or higher? Jerry Linden from New Jersey. Oils crowded the short oils, they crowded trade. The inventory's were bad today, meaning they were high. And oil leaped up.

I don't like the oil market, I think those who read the ... Our bulletins know that we had sold higher, debating rebuilding, we bought some Cimarex yesterday. You know, this was one that you just can't decline from 125. We're not anxious to rebuild oil.

It's down a dollar today, goes below our last buy, we will buy some. Schlumberger's now down ten straight points. That's as crazy as the ten straight up. You'd say, "Well, why didn't we take profit to Schlumberger?" Ultimately, Schlumberger management has been saying that 2018 is a term year. They told us that the market was gonna go down, why should I not believe they're gonna be right this time?

Number nine. Do you have any tips on how to deploy capital during volatile times? Brown from Atlanta. Listen, that's exactly what we're giving you in this call. It's exactly what we're giving the bulletins. We think it's very important that you be ready, like we were with Goldman.

Suddenly interest rates just ticked down. Can you believe this nonsense that we have to be involved with? But Goldman Sachs did not come in, it is up three. We are ready to buy more, and you know that we're gonna pull the trigger. If it doesn't come in from up three, we'll probably take a pass, but stay tuned.

Number ten, what sectors typically move lower in interest rates on the rise? Rick M from Rochester. I used to cover Rochester when I was at Goldman Sachs, couple of great accounts. I love stayed at Rochester by the way, beautiful city.

Here's the deal. Utilities are disasters. Real estate investment trust, ridiculously bad. We can not trust them. At times, we used to own Con Ed. What a remarkable run Con Ed has had. But now let's deal with the aftermath.

Con Ed peaked at 90. It ticked, recently, at 75, it's in 76. Do you know that I'm not the least bit drawn to Con Ed, from 90 to 76. Why? Because it only yields 3.75. Hey, you know what? If I want that kinda yield, I am gonna go buy a 3M, a Proctor and Gamble, which if they go down ... Look at Pepsi.

By the way, this is ridiculous that Pepsi Co is down. A couple of analysts who I think are positioning themselves to buy Coca Cola, on Friday when Coke reports are saying sell Pepsi Co with a three percent yield, they don't even ... When you read the downgrades they're not even referring to how great Frito Lay is.

Believe me, I've done more work than they have on this. I am not kidding. Down two and a half, they'll probably cut it again on Friday, with Coca Cola. Could be a chance to buy more.

Number eleven, during times of volatility, do you have any tips on how to manage a small amount that has little money to put to work? This is Pratibha J. Sorry if I mispronounced that. Pick the ones that you know best, okay? That's what I always suggest in those times.

So, if we had Amazon the next week, you know that better than you would know Waste Management. So you've gotta have comfort. Those who know Abbot, Abbot would be unbelievable if we get a slow down.

You could say, "Well, why don't you pull the trigger on UNH today?" Down a buck 30, to 225. All I can say is, "Tempting."

All right, number 12. For a model portfolio, what are your objectives, and goals, and how do you balance between aggressive, moderate, or conservative? All right, it is not science, it is art. We are not algo people. We are living flesh people, look at this.

I cut myself, I bleed, okay? But I look at what we have, and I say to myself, "All right, look at the waiting. Look, Apple's a value play, okay?" What can I say? It's now a value and dividend play.

We got some terrific comments from Tim Cook yesterday. We go over these, Honeywell, Nordstrom's value. As they come down, some of them become more valuable because of the yield. What I guess I'm saying is, please stay close to our rankings. That will tell you what to do. It's really important you stay close, more than ever.

More than any other time in the 17 years I've been running the trust. Remember, we've morphed into a club, and a recommended list. In part because in the time since I've started, we started the morning show, I started working on the street after my late friend Mark Haines passed away.

And ever since then, it's been almost impossible to do the trust side. It's really hurt us, but it hasn't hurt us from writing bulletins. Why did the market just turn up its interest rates? Because they went from 20 ticks down to 16 ticks down.

Number 13. Are there any situations where you would not want to reinvest dividends? Well we can't, because it's a charitable trust. The answer is, never. Always reinvest. Compounding of money, is responsible for huge part of the S&P's gains, as are dividends. But you must reinvest.

All right, number 13. Are there any situations ... Oh I'm sorry, we had that question already. I think we should go to, what is the difference between trading during regular hours, versus pre market after hours? What are the benefits and disadvantages?

Okay, I think all the pre market is phony, and sometimes really stupid. Like you'll get a headline which says ... Let's use PepsiCo. The headline said that's a better than expected quarter. The stock was up a dollar.

I was talking to Jeff and Zev, like we do constantly. I'm really riding these guys, they ride me too. Because these are some unbelievable people that we have on this. And all I can say is, Pepsi was up a dollar. I said, well, if we were the hedge fund we'd sell the Pepsi, because they're not gonna like the gross margins. They're not gonna like the carbonated soda, they're not gonna like the Diet Coke down high single digits.

Well that proved to be right. It would be been great, okay? It would've been a great sale, but it was the opposite of what the pajama traders ... I call them that because they obviously do the work. They read the headlines, or they just have a feel. There is no feel.

The purpose of after hours, and before hours, I think, is to gaff you. Go read Confessions of a Street Addict and I will tell you exactly when I've got gaffed, because I've used early and late. I don't want you doing it. I want you to have the depth of the stock market in your favor.

Look at how much we move a stock, typically it's bad enough if we do it before hours or after hours. Or if you do it, I am confident that you will lose money. As a matter of fact, I'd like to issue a money back guarantee, for the people who do that, because you're obviously not even paying attention to us, so don't even take us.

Number 15, do you have any books that detail an exit strategy for stocks with losing positions? All right, this is very tough. But Real Money, I talk about it. When I talk about your first loss is your best loss, which was why we screwed up on the Allergen. My first loss, when we ... When the Pfizer acquisition broke, this is before many of you joined the club.

We should've just left it right there, that was bad discipline. When GE, when John Flannery came in, and he said, "You know what? We got a problem with longterm care", I should've just said, "That's it." I like to talk about our mistakes. Why? Am I a masochist? Yes. But I also believe that if we go over what we did wrong, and contain the losses, we will make far more money.

Remember, I can say, "Well listen, let's put an asters delegate. There are no asters, it was a mistake. I go over the mistakes, we reflect discipline, it makes us much more valuable. Goldman Sachs up four. Honeywell, still down a penny. I still say that's good.

All right, so let's just talk granular for one second about what we're up to. I want to thank you all. The club is ... I was out with my wife last night. And we were thinking ... And I also was out with a new board member from the street.

And what we were thinking is, what do you like to do most? And what I like to do most, is to huddle with Zev Fima. Who by the way, met his intended on Match ... I don't know if you saw the interview with Match. I don't like that stock, but I recommended it at 12, it's in the 30's.

And I go over with Jeff Marks, also of Philadelphia, and equally as excited. Turned me onto a link that actually lets you hear the Eagles win. And I come back, and I say, "This is what I like to do." I come in in the morning, at quarter of seven. They're there working. Do I say good morning? Is it really time for that kind of nicety? I say, "What do we have on Goldman?" And then after that, if we wanna say hi, we do the hi thing.

So, that means I like the club that's kind of like what I used to do. I like people who talk about stocks. I love your questions, we all love your questions. We wish you would give us more. That's part of the club.

This is what I like to do. Yes, I love Mad Money. I love to walk on the street. I love writing for real money. But it is this, helping you learn how to invest, that I like better than anything I do, other than try to get a reservation for tonight for Valentine's Day, which is impossible, and being with my family.

I wanna thank everyone for being on the call. I wanna thank everyone ... I know I went a full hour, and I know it's busy, and I know the market's crazy, but you deserve it. You're club members. I love ya, see you next time.