American Express to the Sell Block - Cramer's Mad Money (10/2/08)

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Thursday, October 2.

Commodities Concerns - Mosaic (MOS), CSX (CSX), Union Pacific (UNP), Heinz (HNZ), General Mills (GIS), Colgate-Palmolive (CL)

Whether there's a bailout plan or not, there's a crash looming on the horizon according to Jim Cramer. He said that every company that exports commodities or helps ship commodities is in big trouble. Cramer said it’s as if the countries of Brazil, Russia, India and China, or BRIC as he calls them, have completely dropped off the map. These countries, once ravenous importers of commodities like oil, coal, steel, fertilizer, iron ore and aluminum have seen a sudden downward turn in demand, leaving U.S. exporters holding the bag. "It's impossible to know how low these commodities will go," said Cramer, but for companies like fertilizer maker Mosaic, it’s a stunning turn of events. Cramer said these stocks, along with railroad companies such as CSX and Union Pacific, are now the targets of relentless hedge fund selling as the commodities keep falling and fund redemptions keep growing. Cramer said even with a federal bailout package to save the U.S. economy, these export and transport stocks won't be saved since they're levered to the economies of the BRIC countries. Indeed, he said the only international stocks he would recommend are defensive and soft goods names like Heinz, General Mills and Colgate-Palmolive.

Stocks for a Bad Market - Poermian Basin (PBT), Linn Energy (LINE), Enterprise Product (EPD), Kinder Morgan Partners (KMP)

What do you do in a bad market where every stock is headed lower? Cramer says you invest in stocks that don't need to go up in order to make you money. According to Cramer, one of the best ways to make money in a down market is to invest in what he calls "money machine stocks," with big, serious dividends that pay you to wait for the market to turn bullish. He mentioned companies he feels are the best ones to own with big, but safe, dividends. Cramer's favorite four dividend stocks include Poermian Basin, with an 11.7% yield, Linn Energy, with a 16.3% yield, Enterprise Product, yielding 8.2% and Kinder Morgan Partners, yielding 7.7%. Cramer warned that these four stocks are trusts in the energy sector. While they provide enormous yields, the stocks have taken a beating in recent weeks. "There is downside risk," he told viewers, saying that the stock prices will go even lower if the price of oil continues to decline. He said the dividends, though, are safe. Poermian Basin and Linn Energy are producers of oil, making them more susceptible to the price of oil. Cramer said Poermian Basin provides a higher level of certainly among the two, but offers no growth. Linn, he said, is still acquiring new properties and offers more growth, but also more risk. Cramer said both Enterprise Partners and Kinder Morgan are not producers, but rather transporters, of oil and these entities are less susceptible to market volatility and offer lower, but more stable dividend yields.

The Sell Block – American Express (AXP)

Cramer explained that in addition to being a bad time for credit card companies, with the U.S. jobless rate rising, bankruptcies up 32% year over year, home prices still falling and credit card defaults rising, it's an even worse time for American Express, which has become “the stock I am most worried about in the Dow,” said Cramer. “It’s a bad time to be a credit card issuer,” he continued. While American Express is the fourth largest credit card issuer in the country, he emphasized, that “the difference between American Express and the other credit card companies is that they are banks.” Cramer recommends waiting for any strength and then selling. More bad news: Their success relies on a strong economy and lots of consumer spending. American Express has lower reserves and has to pay increasingly high interest rates. This makes Amex both economically and financially sensitive to market gyrations. American Express has no deposits. That means the once mighty Amex, which once required all balances to be paid off each month, now relies on the market and asset-backed securities to fund itself. Its problems have a lot to do with high risk and geography. Poor lending is a concern, said Cramer, with 32 percent of American Express cardholders now considered high-risk. He said the company also has increased exposure to mortgage defaults, with 17% of its cards based in California and another 8% based in Florida. Also alarming, he said, are the company's dwindling loss reserves. Cramer called American Express a great company that's lost its way. The company expects to earn $2.92 a share next year, but Cramer said he's seen estimates as low as just $2.25 for the company. Amex missed estimates by 27 cents a share last quarter, and he expects that to only be the beginning. The company is a “fallen angel” and “may struggle to remain independent.

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Comments

[rogerk2:]

Re: AMX - have you seen their latest commercial? "His VISA card was over the limit. His fiance told him to call American Express."

Maybe that's why they're mired in credit defaults...they'll give you a card even if you're already in over your head in debt.

2008 Oct 02 11:34 PM

[JoeChase:]

PERMIAN NOT POERMIAN
as in "Permian Basin Royalty Trust"

2008 Oct 03 08:00 AM

[JoeChase:]

PERMIAN NOT POERMIAN
as in "Permian Basin Royalty Trust"

2008 Oct 03 08:00 AM

[Norman Lepo...:]

Why didn't he say to sell AMEX when it was 10 points higher? That's right, it is always buy high and sell low with Cramer. Anyone remember when FCX was a "bulletproof" stock at 110? I sold GE and have had enough of these morons at CNBC.

2008 Oct 03 10:42 AM

[Boulderbiker:]

Do your own research, doc.

2008 Oct 03 11:28 AM

[Greg Pinelli:]

Absolutely right concerning LINE and EPD..these equities will be the T-Bills of the future.....money too safe to lose and a return that will drive LINE to $35 and EPD to $40 in months.......What's lost in the noise of the "financial" debacle is that certain MLPs are fundamentally untouchable.
The panic selling we've seen make both unbelievably cheap.....

2008 Oct 03 09:08 PM

[Bobco23:]

Oil and gas royalty trusts are not just a liquidation of assets play where the only upside is price. The stocks sell on a discounted cash flow model of price times estimated or proven reserves. As price rises, the pool of reserves increases. This is the result of price now justifying bringing on-line, previously "unprofitable reserves" (higher cost to develop into producing wells) excluded in the prior cash flow model into the "useable reserves" catagory and a new cash flow model. In a rising oil and gas market the trusts shares move up on yield (distributions) and reserve increases.

When oil and gas prices decline, you have a great opportunity to buy cash flow and appreciation. Check out CRT, BPT, SJT, as well as PBT.

Amazingly price increases supply. I think I have heard that somewhere before.

2008 Oct 03 09:59 PM

[Traveler Ch...:]

Should I be concerned about my AMEX traveler's checks? If AMEX files for bankruptcy, is it going to be worthless?

2008 Nov 13 03:22 AM