I thought we’d let the shills get a word in first thing this morning and get it over with:
If you thought you heard Cramer call a bottom during Tuesday’s Mad Money, you were right.
“It smells to me like something, in fact many things,” he said, “have at last changed for the better.”
“I am indeed sticking my neck out right here, right now,” Cramer continued, “declaring emphatically that I believe the market will not revisit the panicked lows it hit on July 15. and I think anyone out there who’s waiting for that low to be breached is in for a big disappointment and [they’re] missing a great deal of upside.”
“Stop waiting,” he said, and “buy the next dip because I think it might be the last big one.”
What has brought about this bottom, pray tell? Here’s a summary of his reasons:
1. Negativity is so bad we might be at the point of total capitulation.
2. The "power move" by Merrill yesterday shows that they can "unload all the bad paper", and now companies like Lehman, Citigroup and Wachovia can follow suit.
3. Companies have shown they can handle the commoditiy inflation through price increases.
4. The Securities and Exchange Commission announced it will continue to protect 19 banks in danger of having massive hedge funds short sell them into the ground.
5. Cramer likes the housing bill, because "major banks can now sell their bad mortgages to the Federal Housing Authority for 80 cents on the dollar".
We could take a long time debunking these points one by one, or we could just point out the news from this morning:
The economy grew at a 1.9 percent rate from April through June, less than forecast, after a 0.9 percent gain in the first quarter that was smaller than previously estimated, the Commerce Department said in Washington. The report also contained annual revisions that lowered the growth rate back to 2005 and showed the economy contracted in the last three months of 2007.
About $78 billion in tax rebates went out by the end of June, tempering the fallout from the biggest collapse in residential construction since 1982. A report tomorrow may show the economy lost jobs for a seventh consecutive month, heightening the risk that growth will again falter.
“As the stimulus spending wears off, with the backdrop of a weak labor market, consumer spending will take a leg down,” John Ryding, chief economist at RDQ Economics LLC in New York, said before the report. “That’s when you might get a conventional GDP recession.”
Cramer’s conclusion:
“My bottom call isn’t gutsy,” Cramer said. “I think it’s just a smart call that all the evidence points toward.”
“Bye, bye bear market,” he said. “Say hello to the bull and don’t let the door hit you on the way out.”
My conclusion:
In a world where writedowns and foreclosures continue to abound, with credit still tight, oil still high and consumers pulling back- Don’t say good bye to that bear just yet. I think he just took off his hat and coat and is making himself comfortable.
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That would be Cramer’s Wednesday rant not Tuesday. He did at least own up to the FHA bit as being a major bailout leaving the taxpayers holding the bag.
Look, the biggest mover behind this latest rally was Merrill’s “sale” of it’s CDO portfolio to Lone Star, a Texas private equity firm, and it “sale” of $8.5B in common stock. In fact, Cramer said that this “should be the model for all the other banks” to get out of their current financial quagmire.
Well, here’s a couple things you probably didn’t know about the deal.
1) Of the $8.5B raised by selling common stock approximately $3B was given to Pemasek as compensation for Merrill having to raise capital below Pemasek’s buy in price from earlier in the year. So, net raised was about $5.5B
2) The “sale” of the CDO portfolio to Lone Star was accomplished by Merrill lending Lone Star approx $5B of the $6.7B sale price. In addition, should Lone Star chose not to repay the loan Merrill and Lone Star agreed that the only asset Merrill would have would be allowed to go after are the CDO’s themselves. So, essentially, Merrill is still on the hook for the CDO’s because you for sure that if they continue to deteriorate Lone Star will walk away and Merril will have them back on the books but be out the $5B they loaned Lone Star.
3) Just 11 days before this all took place John Thain, Ceo of Merrill, said that he ws “comfortable with their capital level” and did not feel that they would have to raise more or sell more assets.
At any rate, do the math and Merrill actually raised about 1.5B while diluting common shareholders to the tune of about 30%, all while doing absolutely nothing to get off the hook for their worthless CDOs.
Can someone, please, tell me how this is a model for anything other than fraud, manipulation and downright thievery, especially while Thain is on TV every single day LYING about the financial position of his company?
Igor says: Econ 101
dogtownsurfer -
You’re not the only one who noticed.
“A hair of the dog: Congress has been too lenient on Fannie Mae and Freddie Mac”, Economist, July 31, 2008.
While I normally disagree with Cramer on just about everything, I have to say that at least in the stock market, both the technicals and the general perception is one of total capitulation.
Funny thing about capitulation… it can drag on longer than most people thing, and good investors are far too often early to the banquet. Buffet has been credited with saying, the market can remain irrational longer than you can remain solvent.
1.5 years ago, my technical analysis showed that we’d see capitlation when the down hit 10500… which we still haven’t.
I have losses just from buys I made 2 weeks ago, thinking the same thing as Cramer. The verdict is still out on whether this is a bottom, and frankly, it is very hard to pick a bottom.
We’ll see if he got this one right.
Chuck-
I just don’t see fundamentals supporting this as a “bottom”. As long as assets continue to decline, financials are going to get hurt.
I’ve been intrigued by the current inflation/deflation debate. On the one hand, commodity prices have gone through the roof- but seem to be coming down now. Yes food and gas have risen sharply, but will that continue?
Then I keep looking at one of my favorite economic barometers- Craigslist. There is a marked increase in the number of boats, trailers, musical instruments, spinning wheels [Don't laugh- I'm a "spinner" when I get the chance- which isn't often any more.] you name it. Prices are dropping fast.
We are nearing the end of the selling season, so while MOM price drops have been decreasing on Case-Shiller, I expect those to increase as the housing market slows this winter.
In the grand scheme of things I’m not certain if hyperinflation or deflation is the bigger threat, but whatever is happening, it does not appear to be all uphill from here. That said, “bottoms” are a lot easy to call in the rear view mirror, and my best guess is that at the moment, it’s hard to see ahead, even with your brights on.
Dow down 200+ today.
Better luck tomorrow, Jimbo!
Can someone please explain to me why deflation is considered such a bad thing?
I must be missing something because to my way of thinking it would seem to strengthen the dollar and increase the purchase power of the consumer. Both would seem to be ideal ways to jumpstart more consumerism that supports the economy as a whole.
Bristinwolf:
In periods of deflation, the value of assets fall. All the leveraging on the way up can be a killer on the way down. It leaves banks without money to loan against and hurts the balance sheets of companies.
If you are looking to buy these depreciated assets, it works out well- it’s just a killer if you are the one losing the value.