Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Tuesday May 25.
Special Guest: Senator Ted Kaufman, D-Delaware
Experts are still debating about what caused the "flash crash" of nearly 1,000 points in the Dow on May 6. Cramer blames accelerated trading and "ETFs of mass destruction" which are double and triple leveraged to the short side and can drive down stocks. The repeal of the uptick rule that forced short sellers to wait for a stock to tick up in price before trading has also contributed to volatility.
With high-frequency traders able to spin their portfolios 11 times in 10 seconds, technology seems to bear partial blame for the current volatile environment. While a "circuit breaker" rule that will automatically freeze the trading on any stock in the S&P 500 that drops 10% in 5 minutes has been proposed, this legislation would not cover the very ETFs which are doing the most damage. Senator Kaufman discussed how he predicted this problem well in advance:
When you have a lot of change and a lot of money, and you have no transparency, therefore no regulation. So you have a problem. That is what happened to derivatives, and back in September, I noticed the same thing about high frequency trading. We basically have gone from a floor based system to a system with digitalization... We have gone from basically 4 years ago, 30% of our trades were high frequency trading. They went to 70%. No one knows what is going on inside here. They are trading thousands of shares per second and no one knows what is happening.
Senator Kaufman went on to say high frequency trading has grown like a "giant weed," and to finally uproot the problem, more people need to make noise about it and complain to the SEC. When traders argue that liquidity has improved, Kaufman replies "transparency trumps liquidity." Senator Kaufman is optimistic that reforms will be made; "We are going to get this together. I think everybody. We just need a lot of help with people calling attention. We have got to get together and work on this."
As long as the press is painting horror scenarios about the economic decline in Europe, Cramer envisioned a series of events that could send the Dow down 20%. If European governments fail to lower interest rates or refuse to unite in a bailout of failing countries, if a couple of sovereign banks fail, and if there will be a 20% slowdown in economic activity across Europe and a 10% decline in Asia's economy, the Dow could see the 8,260 level.
However, Cramer doubts things will become this horrible. States are seeing increases in manufacturing activity and gradual declines in unemployment. Falling oil will mean more money in consumers' pockets to spend, and retail is currently healthy. Mortgage rates are low enough that the canceling of the first-time homebuyers tax credit is hardly felt, and at the same time, house prices are rising.
These things do matter,” Cramer said. “They are the tells for the U.S. economy going forward, and therefore the stock market six months out.” He thinks fears of a European economic collapse are excessive and should not be bringing stocks down. In fact, if European governments make needed reforms, Cramer envisions a "vicious move up" for domestic stocks. His investment strategy is to stick with strong American stocks like Apple (AAPL), Intel (INTC), accidental high-yielders like Annaly Mortgage (NLY) with a whopping 16% dividend, and three utilities with rising growth rates: Pepco (POM), Progress Energy (PGN), and Exelon (EXC). "Don't give up," urged Cramer. "Too much good is happening."
Whence the Euro? Currency Share Euro Trust (NYSEARCA:FXE)
Although it doesn't seem to make much sense, American stocks are incredibly affected by the European market, sometimes even more than European stocks. Case in point: the S&P 500 was down lower than the German market. Therefore, it is useful to know where the euro is headed and what fluctuations in Europe's currency will mean for the U.S. stock market.
First, Cramer consulted Currency Share Euro Trust's (FXE) chart, which he admitted was a "gruesome sight." Every time FXE approaches the 14 day moving average it gets slapped back down, and the relative strength index is also showing resistance to the euro. The weekly chart shows a head and shoulders pattern which could mean a short-term drop to $117 and even a fall to the $99 level by the end of the year. Cramer says the fundamentals of the euro agree with the negative story told by the charts and he would continue to invest in high-yielding U.S. stocks that have little or no exposure to Europe.
When a viewer asked Cramer about Avon (AVP) he recounted the company's tale of woe: an investigation of the company has started in China and it will cost Avon $100 million, the quarter was not so hot and money is getting lost in the currency translation. Cramer would buy direct-marketers Herbalife (HLF) and Tupperware (TUP) instead of Avon. Cramer told another viewer to get out of Las Vegas Sands (LVS) and buy Wynn (WYN) because of strong numbers coming out of Macau. Cramer would buy more Plum Creek Timber (PCL), and dismissed the decline in timber futures as "nonsense."
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