Seeking Alpha
Profile| Send Message|
( followers)  

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Thursday June 10.

China and the Hedge Fund Herd

In spite of the thrilling action on Thursday, with a 273 point rise in the Dow and the S&P 500 moving up 3%, Cramer advises caution. It wasn't improved fundamentals or positive data from China that moved the markets, but the rally was courtesy of the "herd" mentality of the fund managers. "They all follow the same playbook," Cramer spoke from experience as a former hedge fund manager. The buying and selling of commodities based on numbers coming out of the Middle Kingdom is a major driving force in the market.

Worries about China and the selloff in commodities began in 2008. News of a Chinese stimulus brought back these stocks more than a year later. Recent worries about the European economy and China's government orchestrated "soft landing" were behind the recent softness in stocks. China's data on Thursday that its exports rose the highest amount in six years, that inflation was being held in check while growth is accelerating made the hedge fund managers reverse their short positions.

Hedge fund managers, unlike those who run mutual funds, need to make money every day, and their reaction to every data point is overly dramatic. Add to this the impact of quick trading and double and triple leveraged ETFs. The new reality is a hedge fund with half a billion dollars can create $2.25 billion in buying or selling power. Cramer says the bottom line is that the bullish action on Thursday was more about the hedge funds' reaction to China than China itself.

CEO interview: Richard Wolford, Del Monte (DLM)

While Thursday was good for stocks, Cramer reminded viewers that the general market right now is volatile, and he would look for defensive stocks for safety. Del Monte is a play on the mini-bull market in pet foods which is thriving on the 55 million pet-owning homes in America and on the fact that pet owners generally refuse to shortchange their pets by trading down, even in a rough economy.

Del Monte (DLM) beat estimates by 9 cents when it reported 31 cents per share. Although its sales fell short of expectations, the loss was offset by cost cuts and strength in pet food sales. The company boosted the dividend by an amazing 80% and announced a substantial buyback of shares. Cramer notes the 11 times earnings multiple compared to a 10.6% growth rate makes the stock cheap.

Del Monte has perfected the strategy of buying up tired brands like Meow Mix and Milkbone and revamping them. It invests a considerable amount in marketing, and increased its spending in this area 55% over last year. Although Cramer said he caught a double in the stock from where he recommended it 18 months ago, Del Monte is "so not done" going higher.

Itau Unibanco Holding (NYSE:ITUB), Banco Bradesco (NYSE:BBD), CPFL Energia (NYSE:CPL), Gafisa (NYSE:GFA), Ambev (ABV), Vale (NYSE:VALE), Petroleo Brasileiro (NYSE:PBR), Pepsi (NYSE:PEP)

With all of the depressing data coming out of Europe, it is more pleasant to focus on Brazil's "en fuego" economy, which grew the most of any world economy for the first quarter, an impressive 9%. The middle class continues to grow, and now represents 49% in a country that was once characterized by harsh class divisions.

Brazil is experiencing a credit revolution similar to that of the United States in the 1950s; loan growth could expand by 25% over three years. Since Brazilian banks have tight government controls, this boom in credit is unlikely to give way to crisis. Cramer recommended stocks on the growth of Brazil's middle class:

1. Itau Unibanco Holding (ITUB): A premier Brazilian bank, Itau is down 16% and is at a good entry point.

2. Banco Bradesco (BBD): Cramer doesn't think this bank gets enough credit for its insurance business or its investments in IT. He added BBD and ITUB could "Take over the world if they wanted to."

3. CPL Energia (CPL): Although this stock is up 55% from last year, with its 7% yield and exposure to the growing utilities industry, Cramer says it is still a buy.

4. Gafisa (GFA): "The cheapest homebuilder in the world, and the worst-performing stock," said Cramer. Gafisa is down 25% from last year. However, the company has government support and as more Brazilians can buy homes, Gafisa will "roar," according to Cramer, who says the stock has had an unfair decline.

5. Ambev (ABV): This is the sole bottler of Pepsi (PEP) in Brazil and of beer brands that together have a hold on 70% of the Brazilian market. This stock has a respectable 3.6% yield.

Cramer said he wanted to add Vale (VALE) and Petroleo Brasileiro (PBR) to the list, but these stocks are not really plays on the middle class. He would try to get in on PBR's secondary offering.

How the U.S. can prevent a liquidity crisis

Cramer invited Oklahoma Senator Tom Coburn on the show to discuss how the U.S. can avoid a liquidity crisis. While the U.S. sells short-term debt to finance our budget at low rates, there could be problems when the debt comes due in a couple of years at a higher rate. Cramer and Senator Coburn think the U.S. should sell $2 trillion worth of 30-year treasurys to avoid a liquidity crisis. While Secretary Geithner has rejected this suggestion, Senator Coburn says the government is thinking "short-term."

“They’re afraid to spend a dollar today,” Coburn said, “to prevent us from spending $10 or $12 in the future,” the Senator said.

:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::

Jim Cramer was up 31% in 2009. Click here now to sign up for Jim's Action Alerts PLUS and trade alongside him. Special discount for Seeking Alpha users.

Get Cramer's Picks by email - it's free and takes only a few seconds to sign up

Source: Cramer's Mad Money - China and the Hedge Fund Herd (6/10/10)