“What do we do if we’re out of money? Don’t mutual funds have enough cash? That’s my reaction to today’s market action. Right now, mutual funds know they have to pivot out of consistent growth stocks, especially tech stocks like software and semiconductors, which don’t benefit from rate cuts. They need to swap into companies that can supercharge their earnings as the Fed lowers rates. We all recognize that cyclical stocks, the ones that benefit from lower rates, can go higher, maybe much higher.”

“What’s painful for many of you are the declines in stocks of companies with consistent earnings. These companies, especially tech firms, don’t really need lower rates, and they’re selling off as money managers raise capital to rotate into the rate-cut winners.

So, why don’t we go over the winners and talk about the losers? The rate-cut winners are divided into two camps: stocks with high dividend yields and cyclical companies with earnings that should go higher because lower rates will bolster various industries, especially housing.”

“Let’s start with the most direct beneficiaries: housing. These stocks were all down today because hedge funds and mutual funds bought them aggressively ahead of Friday’s Jackson Hole verdict. Mutual funds are staying long, but hedge funds are ringing the register furiously because they’ve made so much money. Housing stocks had parabolic moves going into the Fed’s Jackson Hole conference, so now these portfolio managers are just taking profits. That’s what you’re supposed to do with a successful trade if you’re a trader.

Remember, these guys are traders, not investors. So, the housing trade is over, but what about the housing investment? I believe Toll Brothers, which just reported a stellar quarter last week, can go higher, maybe much higher. But this reversal is going to constrain the stock because people do not like the technical trends we just saw. We’ve seen multiple long-term reversals after these kinds of moves, and they rarely turn out to be buyable, even though in theory, this should be a great moment for the stock of all the homebuilders.”

“It doesn’t matter, though. This kind of reversal I’m talking about can be hideous. Some of these stocks are very close to their highs, and I don’t like that.”

“Those who have them can hold on, but they flew too close to the sun to attract new buyers. Remember, I’ve said all along that by the time the Fed gives the all-clear, it may be too late to buy the most obvious rate-cut winners. You have to let them recharge, let them come down, and then you can pull the trigger.”

“One of my favorites, though, is DuPont, which is splitting into three companies, one of which—classic DuPont—has Tyvek, the obvious housing play. The Trust owns it, and I think it could rally much further, especially if it gets bids for its water division, which is technically for sale.”

Our second quarter results were clearly encouraging. Volume recovery is a key driver of our improved Q2 financial performance. Additionally, our ongoing commitment to drive productivity and operational excellence as well as continued savings from restructuring actions announced last November are also contributing to top line growth, margin expansion and cash flow improvement. Net sales of $3.2 billion increased 2% versus the year ago period, as a favorable portfolio benefit of 4%, reflecting the Spectrum acquisition was partially offset by a 2% currency headwind.

Organic sales were flat as a 2% increase in volume was offset by a 2% decrease in price. Higher volume was driven by broad-based growth in electronics markets within semi and interconnect solutions with year-over-year reported volumes up more than 20% and mid-teens, respectively. These gains were partially offset by year-over-year declines in China within Water Solutions as well as Tyvek Medical packaging. However, we did see sequential improvement in these areas, as Lori mentioned. On a segment view, E&I organic sales inflected to grow 8% while W&P organic sales decline moderated to 6%. Organic sales in corporate decreased 5% versus the year ago period. From a regional perspective, Asia Pacific delivered 3% organic sales growth versus the year ago period with growth driven by China, where organic sales were up 8%, led by strong growth in E&I.

In other regions, the North America was down 2% and Europe was down 7%. Second quarter operating EBITDA of $798 million increased 8% versus the year ago period as volume gains, lower product costs, Savings from restructuring actions and the earnings contribution from Spectrum were partially offset by higher variable compensation. Operating EBITDA margin during the quarter was 25.2%, up 130 basis points versus the year ago period and up 190 basis points sequentially from first quarter. Additionally, I am very pleased with our cash flow performance as we reported another quarter of strong cash generation and conversion. On a continuing operations basis, cash from operations of $527 million, less capital expenditures of $102 million, resulted in adjusted free cash flow of $425 million.” (Click here to see more…)