Cramer's Mad Money - Making Money in a Changing Market (3/26/10)

by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Friday March 26.

Editor's note: this is a rebroadcast of a show that originally aired on December 28, 2009.

Lions and Tigers and Bear Rallies...Oh My!

On Friday's program, Cramer discussed tips on making money in a changing market. First, he suggested viewers avoid adhering too rigidly to "animal metaphors" about the market. For instance, a bear market rally is still a legitimate rally. The press, which tends to be negative about the markets, will often be cynical about a rally during a general economic decline, as if it doesn't really matter. Cramer calls this kind of thinking "pernicious" and blames it for having kept so many investors on the sidelines from the upturn in March 2009 until now. Investors who were discouraged from buying stocks because of the "bear market rally" would not have benefited from the long-term rally that lasted several months, because they would have been overly concerned about the so-called "bear market."

The Best Capitalists in the World: Caterpillar (NYSE:CAT), Bucyrus (NASDAQ:BUCY), Joy Global (JOYG), CSX (NYSE:CSX), Burlington Northern (BNI), Qualcomm (NASDAQ:QCOM), Hewlett Packard (NYSE:HPQ)

Cramer gave the bad news to viewers, if indeed, it is still news. The U.S. is no longer the center of the universe. It used to be that other economies were more dependent on the Federal Reserve's actions than what their own central banks did. It used to be that when the U.S sneezed the rest of the world caught a cold. "We have been displaced by Communist China, which, in many ways, is more important to the global economy than the American economy. No one wants to acknowledge this because it is depressing, but…until you acknowledge the supremacy of China, there is no way that you can make sense of this market."

The Chinese bought our debt, their demand powered our bull market. Even Lehman Brother's collapse would only have caused a "garden variety" depression if Chinese demand hadn't tapered off, and our markets rallied in March because of Chinese demand. Our industrials are dependent on China: Caterpillar (CAT), Bucyrus (BUCY) and Joy Global (JOYG). Even U.S. rails such as CSX (CSX) and Burlington Northern (BNI) are speeding up because of materials they transport to the coast to be shipped to China. The $40 billion Chinese stimulus to build wireless infrastructure had a positive impact even on Hewlett Packard (HPQ) and Qualcomm (QCOM).

Cramer said that, like it or not, the Communist Chinese are the world's best capitalists right now.

Follow Big Money

One way to make money is to piggyback Big Money by figuring out their next move. Fortunately, this isn't too difficult, but it may seem a bit boring. The formula is pretty simple. When mutual funds have more money, they tend to expand their positions in stocks they already like. All the private investor has to do is to find out which stocks are Big Money "darlings," check that they have strong fundamentals to back them up, and buy on declines and look for patterns when funds tend to buy and sell. Cramer would get out of stocks that have had poor performance for three straight months, because that is when money managers tend to dump stocks.

Ever-Changing Indicators

From gold prices to the Baltic Dry Freight Index, to plain old charts, indicators change as the economic climate changes. Cramer made the following analogy:

It is not like being a pilot, where your instrument panel with all of the indicators that you rely on, all in the same place, meaning the same things… no, frankly it is just the opposite… every time you go up and try to get a fresh view of the direction of the economy in the market… you got to learn to fly all over again.. because the indicators that you are using, the various pieces of information, with some kind of predicted value… will not always tell you the same thing twice.

For instance, gold was once a barometer for fear of political and economic instability, a hedge against inflation, etc. However, with private investors and funds buying gold for a host of reasons, including as a play on the rise of the middle class in emerging market countries, it is hard to see even gold as a reliable barometer on financial and political stability. When gold ran up in 2009, investors might have been led to sell stocks when they should have been buying. Who would have thought a dramatic increase in the price of gold would be followed by a long rally in stocks?

While gold is no longer a reliable indicator, Cramer thinks, given Chinese economic supremacy, the Baltic Dry Freight Index, which measures shipping, is a new "gold standard" indicator.

Analysts and CEOs Don't Know Everything

"Stocks are pretty good indicators of the future and they tend not to lie." If an analyst is vulnerable to personal bias, CEOs certainly can be blind to their companies' faults. Cramer many times has invited a CEO on who crows about his company, when Cramer knew the business was about to fall off a cliff given the cycle.

Cramer urged investors to figure out where a stock is going by making their own targets. This can be done by figuring out what a stock might earn in the future and then determine what the investors are willing to pay for those earnings; this is the price-to-earnings ratio. Mutiplying the P/E ratio by earnings estimates can produce a reliable price target for a stock. Cramer added it is also important to take into account the economic cycle and to know what kind of stocks perform well in which cycles.

Experts aren't necessarily those who specialize in stocks or analysts. Cramer says it was only by consulting restaurateur and hospitality expert Danny Meyer that he was able to know what consumers were willing to pay up for during the recession and what they were more likely to cut from their budgets.


Jim Cramer was up 31% in 2009. Click here now to trade alongside him.

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