Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Thursday, September 11.
Hedge funds have more control over stock prices than market and business fundamentals, Cramer said, but now it looks like at least two companies are fighting back. He said that the hedge funds were betting on a market collapse as worries about Lehman Brothers and Washington Mutual continued. However when that theory failed to materialize, the market turned volatile after the funds frantically covered their positions. It’s true that the fall of commodities themselves is partly to blame, but the rate of decline for the sector’s stocks has far outpaced that of oil, natural gas and other resources. Investors in poorly performing hedge funds are demanding their money back, so the funds are dumping millions of shares into the open market to generate cash. The trend has been enough to drive both investors in and CEOs of these commodity-related companies crazy.
But today Joy Global and CSX pulled a Howard Beale, declaring they’re mad as hell and they’re not going to take it anymore. Joy Global plans to buy back a full two-fifths of its capitalization. Two billion dollars worth of this $5 billion company will be repurchased. CEO Michael Sutherlin has had enough and he’s putting a floor under his stock. Granted, the fact that Joy Global is only up 12% today shows you that this market is still out of control, but this is still a big move.
Then there’s CSX. CEO Michael Ward on has been fighting an internal battle for control of the company with two hedge funds, but luckily for shareholders he’s managed to keep his job. The hedge funds had said that Ward wasn’t doing a good enough job unlocking value, but just today CSX preannounced better-than-expected earnings for the next quarter. As a result, the stock rose 11% Thursday. There’s no doubt that out-of-control hedge funds are still driving this market, but at least some firms are starting to push back.
Black Holes – Lehman Brothers (LEH), American International Group (NYSE:AIG), Citigroup (NYSE:C), General Motors (NYSE:GM), Ford (NYSE:F), Downey Financial (NYSE:DSL), Corus Bankshares (CORS), Bank United Financial (BKUNA)
When things get bad enough, a single company can bring down a sector or even the entire market. Cramer called this his "black hole" theory and said there are a bunch of black holes in the market that are striking fear into investors’ hearts. Don’t expect any relief until those holes are filled in. Europe seems to be haunting both Lehman and AIG, as overseas subprime loans and insurance for bad paper, respectively, drags on the companies. But lack of proper disclosure, thanks to a lax SEC, makes it hard to see just how back things are. Washington Mutual has too many losses to bear on its own. There are serious problems that need to be solved here, and with a plan it’s very likely that Lehman, WaMu, and AIG could all go under. Lack of action on the part of Washington is already creating problems, but things will get worse if we don’t do something now. Many the other financials will win out over the long run, but the failure of any one of the previously mentioned institutions would devastate the rest of the sector in the near term.
The market can’t move on until all of this is worked out. Cramer wants Goldman Sachs to takeover Lehman, Wells Fargo to absorb WaMu, AIG to be broken up, Citigroup to sell off some of its divisions and maybe find some big-money backers overseas. The government should give General Motors and Ford $50 billion in return for a pledge to build natural gas-fueled cars. It might cost as much at $1 trillion, on top of all the other losses we’ve seen so far, but Cramer thinks it’s a small price to pay to avoid another
Think about it: If these companies collapse, it isn’t just the CEOs and shareholders won’t be the only people punished. The rest of the industry will take a severe hit, too. So, too, might the 14 million people who took out mortgages between 2005 and 2007. That could lead to a disaster at least as bad as what we saw in the 1930s, Cramer said. So if you’re the type saying that we should just let these companies go under, remember this: Herbert Hoover had the same attitude. During today’s show Cramer offered up these ideas to get us back on track.
- The Feds tell Lehman, WaMu, Citigroup, Downey Financial, Corus and BankUnited they have one month to raise capital or be taken over. The bad assets then get put into a resolution trust and the good stuff gets sold to better-run banks.
- Once that resolution trust is set up, the government would have to restructure as many mortgages as possible to save both homeowners and the economy. If the Federal Reserve made a bold move and cut rates by a full 1%, that would help immensely. Alan Greenspan did this in 2003, so it could be done again, especially considering the environment right now is dramatically worse now than it was then.
Until Cramer’s two ideas become policy, until the black holes are filled in, the financials will continue to suffer, he said. But Wall Street might be sensing a bottom in these names, so the end could be near. At least that’s what some of the market action said today.
Twelve percent – Legg (NYSE:LM), Freddie Mac (FRE), Yahoo! (NASDAQ:YHOO), Thornburg Mortgage (TMA), Washington Mutual (WM), Yahoo! (YHOO), Qwest (NYSE:Q), Eastman Kodak (EK), Sprint-Nextel (NYSE:S), T. Rowe Price (NASDAQ:TROW)
Back in early January, Cramer put Legg Mason in the Sell Block, saying the firm’s legendary money manager Bill Miller had lost his touch. But he felt the need to reiterate that call Thursday given recent events. Turns out Legg Mason owned 12% for Freddie Mac. In fact, Legg Mason was the largest shareholder. Cramer wondered why the “legendary” Bill Miller couldn’t see the collapse coming, the inevitable intervention by the government and what that would do to the common stock. Now customers are taking their money and investing it elsewhere. Legg reported $18 billion in negative cash flow last quarter. Not good for a company that makes its money by taking a cut of the total assets it manages. Legg’s $923 billion is down 3% from the previous quarter and 7% from the previous year. And Cramer is thinking it only gets worse once everyone finds out Legg owned that much Freddie Mac.
Miller made some other big mistakes, too. He owned positions in Bear Stearns, Countrywide, Thornburg Mortgage and Washington Mutual. The last two are trading at 41 cents and $2.83, respectively. Then there were his positions in Yahoo! (Miller opposed the merger), Qwest, Eastman Kodak, AIG and Sprint-Nextel which are down 50%, 59%, 44%, 77% and 59%, respectively. Just so you don’t think the overall market conditions are the problem here, let’s compare T. Rowe Price versus Legg Mason during this same time period. As far back as Feb. 2, 2007, Cramer told viewers to switch out of Legg for TROW. Since then T. Rowe Price’s up 21% and Legg is down 60%. Remember that $18 billion in cash outflow at Legg last quarter? T. Rowe Price saw an inflow of 2%.
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