Cramer's Mad Money- How to Invest in a Bear Market (12/29/08)

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Monday December 29.

The following is a repeat broadcast of a Mad Money program that last aired on November 25, 2008

Permission to Sell

While Cramer usually advocates buying low and selling high, there may occasionally be compelling reasons to sell in a down market. However, discipline is required to avoid panic-selling, and investors should leave at least a portion of their money in stocks. Cramer has been urging people to sell stocks to raise cash if they will need those particular funds for paying for tuition or buying a house within the next five years. However, one of the best reasons to sell stocks in this environment is to buy them back even cheaper, since the extreme downturn provides a valuable opportunity to pick up good names at low prices. However, stocks held for retirement should be left alone.

What to Own, including Nucor (NUE), Caterpillar (CAT)

Even in the worst market, there are stocks worth owning, and Cramer outlined three criteria. First, recession-resistant stocks such as food, toiletries and drugs can be owned. Second, stocks with strong fundamentals that are trading at or near cash are good investments. Their abundant cash helps support their prices. In the third category are Cramer’s “accidental high-yielders” stocks whose yield has jumped as their stock prices have fallen. Cramer likes high-yielding industrials Nucor and Caterpillar because he believes their yields are safe. He would buy accidental high-yielders on scale based on their dividend rather than their stock price. For instance, he would buy a portion of a stock while it yields 4%, more at 5% and so on.

The Dangers of Cheap Stocks

“Cheap” can be a dangerous word in a bad market, because almost every stock fits that category. “Do we want to own stocks that look cheap or stocks that can go higher?” Cramer asked. Valuation does not work in a downturn and the old formula of looking at a stock’s multiple is no longer relevant because earnings are so uncertain in a bear market. In addition, cyclical stocks are too risky because their estimates may be too high. “Think Bethlehem Steel in the 1980s,” said Cramer.

Stay Out of the Hedges.

Cramer cautioned viewers “Know thy fellow shareholders.” If they happen to be hedge funds, your stock could be driven down as redemptions force selling to raise money. If a stock is owned by one hedge fund, that is risky enough, but if it is owned by several, a selloff can be lethal.

Hitting Bottom

Cramer says most of the time, it is not a good idea to try to predict a bottom, because it is quite difficult to get it right. However, he gave viewers three indications of a bottom in the market. First, the worst should have already happened. If there is still bad news happening, it can’t be priced in. Second, there should be complete capitulation; “You don't bottom with a lot of bulls out there; you bottom when most of the bulls are converted to bears," he said. Third, all the buyers should have become sellers to the point where there is nothing left to sell. Any bottom that doesn’t fit these three criteria is actually a false bottom.

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Comments

[Met-Vin:]

Concerning "Hitting Bottom", the third point, "...all the buyers should have become sellers to the point where there is nothing left to sell..." Is it true that there must be some buyers if someone is selling? Don't we need a buyer for every seller?

2008 Dec 30 07:36 AM

[ArtfulDodger:]

This Cramer fellow is simply too brilliant!

2008 Dec 30 12:28 PM

[deckx:]

Nucor is old news !!, I wouldn't buy any at the moment, think its due to take another dip as its been so hyped up last month.

No doubt all the Cramer "drones" will all rush and buy more so another reason not to get in now !

2008 Dec 30 11:33 PM

[auto44:]

I AM BECOMING WEARY OF CRAMMER,ALSO WARY.

2008 Dec 31 01:49 AM

[Globel E:]

No doubt getting as far as possible from equities owned in major part by hedge funds is a necessary defense against forced selling and its damage. BUT-----how does one tell that there are hedge funds holding a major portion of some given equity? I select only long term safe, short term profitable (not parabolically so) equities and found, to my discomfort, that many of them were obvious victims to the forced selling late in 2008. They were sale-able, less conservative selections were not. So my carefully selected equities very suddenly dropped in face value. The pattern was so obviously that of forced selling (by date) that anyone not comatose could see the pattern --AFTER THE FACT. Most will recuperate (some already have). But, my great preference would be to identify BEFORE some disaster, that hedge funds (almost all of which are dishonestly, at minimum unethically, presented and run) are my fellow travelers. HOW ?????????? I find it difficult to determine even the names of "hedge funds". Were there not over 10,000 early in 2008 - all employing questionable tactics to obtain unusually high returns?

2008 Dec 31 01:23 PM