Cramer's Mad Money - These Stocks Should Not Be Traded (3/31/10)

by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Wednesday March 31.

Stocks That Should Not Be Traded : AIG (NYSE:AIG), Fannie Mae (FNM), Freddie Mac (FRE)

Some stocks trade long after they cease to function as public companies, and these "zombie securities" should be avoided at all costs. Cramer thinks it is an outrage that General Motors was allowed to trade even when it had filed for bankruptcy, was almost entirely owned by the government and its common stock was on the verge of cancellation. The same was true in the case of Fannie Mae (FNM), Freddie Mac (FRE) and AIG (AIG). Where was the SEC? Well, that is the question; "Wall Street is far more lightly regulated than any type of gambling," lamented Cramer.

Avoid the Ivory Tower

While Nouriel Roubini and Paul Krugman are considered to be the greatest minds on today's economy, Cramer encourages investors to think beyond the ivory tower. While academics have intellectual brilliance, not all of their recommendations should be followed. For instance, in the depths of the financial crisis in 2009, the experts were crying out to the government to nationalize the banks. However, after passing their "stress tests" many hard-hit banks were able to raise enough capital to stay afloat. Such a move would have been disastrous for their preferred shares and their bonds. The collateral damage would have been worse than "a half a dozen Lehman Brothers," said Cramer, adding; “We would never have recovered, let alone had the gigantic rally we caught in 2009 off the generational bottom.”

When to Consult the Charts: Big Lots (NYSE:BIG), Bank of America (NYSE:BAC)

While Cramer is usually a fundamentalist, meaning he bases his stock picks on the health of a company's underlying business rather on the movement of charts, there are times when looking at technicals can come in handy. Since money managers have so much influence on the movement of major stocks, it helps to know where these stocks are going. Charts are a good way of predicting when and what money managers are going to buy and sell based on past trends. Investors who followed the charts would have been able to predict the upside surprise after Big Lots' (BIG) rally or would have been able to detect the bottom in Bank of America (BAC). Fundamentals, however, still reign supreme, since they tell you what stocks are worth owning at what price.

Two Scary Bearish Myths

There are many people who have a vested interest in keeping stocks low, mainly because they might want to buy on an extreme decline. Two horror scenarios bears use to scare investors into staying on the sidelines is that the U.S economy will resemble Japan's "lost decade" or we will have hyperinflation as in the German Weimar Republic which preceded WWII

The U.S. has many advantages over Japan, and will most likely not face a decline so deep or so long. While some American banks were "too big to fail," Japan salvaged even its worst financial institutions and paid the price. Consumer spending recovered in the U.S. faster than it did in Japan, and with a growing population, younger citizens and less reliance on exports, America won't fall into the same kind of stagnation Japan did. Cramer also dismissed the threat of hyperinflation, even as the U.S. has been printing more dollars. It is unlikely the U.S. will move from a condition of intense deflation to hyperinflation without a period of growth in between. The bottom line: “sell when our fundamentals are faltering and not when the bears are trying to freak you out.”

The Importance of Inventory: Best Buy (NYSE:BBY), Apple (NASDAQ:AAPL), Corning (NYSE:GLW), Texas Instruments (NYSE:TXN)

One way of predicting whether an industry is in decline or is turning around is to look at inventory. This was especially true in the case of Best Buy (BBY). As soon as it said inventory was down, shares of Apple (AAPL), Texas Instruments (TXN) and Corning (GLW) moved up. Cramer also mentioned that credit access is also an important factor, since it determines whether a company can finance the next cycle.


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