Jim Cramer and Today's Market

I read Jim Cramer’s memoir “Confessions of a Street Addict” a few months ago (very entertaining), but have never read any of his other books in its entirety. I took one out from the library last year and got about halfway through it. I like his show, but admit that I don’t watch as much as I used to.

My main problem with Cramer is his lack of consistency in stock picks. He will pick stocks based on the industry or sector fundamentals and then select a company that does well within the sector. That seems to work well. But then in the next breath he’ll recommend another company in a supremely bad sector and give a cockamamie reason to own it. He has a nightly show so he obviously must make a lot of recommendations and some are destined to be dogs.

Examples of the above are Monsanto (MON) during the recent and continuing rise in grain commodities. Monsanto has done very well and this is the real benefit of Cramer: telling you which company in a given sector will do well. The fact is that any company in that sector would have done okay, Archer Daniels (ADM) was fine and Mosaic (MOS) even better.

On the other hand, Citigroup ( C ) has been pummeled along with all the banks and financials over the subprime mortgage meltdown and the resultant liquidity crisis. Cramer was pounding the table to buy the stock in anticipation of its CEO Chuck Prince being fired. The stock continued to drop and then when Prince was fired, the stock barely budged upward. My problem with this recommendation is that it is not based on the fundamentals of the industry or the company. To recommend a stock on a potential headline is fraught with plain old bad judgment.

Another example of such bad judgment is his recommendation of Alcoa (AA) in October at the outset of a global economic slowdown. His rationale for the recommendation was because he thought AA would get bought out. Again, a potential headline is not a good reason to buy a stock. In addition, the impending drop in the market and continued weakening of the dollar would only give incentive for a potential suitor to wait for a lower price.

I like Jim Cramer. His infectious enthusiasm stimulates people to consider the market. My problem is his lack of discipline in his recommendations and his lack of consideration of macro-economic factors. To him its always a good time to buy stocks even when it may be abundantly clear from a technical and fundamental analysis that the market is in trouble. As with any teacher, you need to know their weaknesses as well as their strengths.

My guess (and I have not looked at his performance in various markets) is that Cramer does well in broad based bull markets but lags in bear markets or in narrow bull markets. To wit, I read a lot of macro-economic websites in order to get a view of the broader economic issues that are driving stock prices. Over the past 18 months they have been very bearish on owning equities and as a result I have trimmed my stock holdings dramatically and hold more gold and silver than usual. This has done well. The only stocks I have held onto are the oils, although I did lighten that load last fall as well.

The downsides in my picks have been my recent acquisition of Goldman Sachs (GS), a company that Cramer obviously likes, but I am holding my position in the expectation that this well-run company will be the first to emerge from the financial sector doldrums. Another financial I recently bought is Wachovia Bank (WB), which has a nice dividend of 7%, and I am about even now on capital appreciation. I think this may bounce along at the current bottom, and as long as they don’t cut their divvy I am honored to get paid while I wait. Bottom fishing can tax my patience.

The rest of the market is a mystery right now because we are going through a transition. Technically it looked slightly oversold last week, but I’m not so sure now. Fundamentally there are myriad stocks with low PE’s and great anticipated earnings (CAT for example) for the next year, but I fear that this is a value trap; if recession does occur, then earnings projections will be revised downward and stocks will have another leg lower to go.

My answer to this is to buy stable industries that have good cash flow no matter what. The industries I think will outperform now are pharmaceuticals and maybe utilities. These have good dividends and will outperform in a recession. Boring maybe, but this market is scary. Traders, moreso than investors, must preserve capital.

Cash should be okay to hold now, too, since the US dollar is at multi-year lows and as the credit crisis spreads overseas we may see a flight to safety. In addition, if/when European Central Bank and Asian banks lower interest rates further, the US dollar should strengthen. Gold should hold its value too, but it has had a nice run right now.

If you are really daring, real estate is very low now. I would be very careful, but REIT’s have nice dividends and some have been taken out and shot unnecessarily.