Back Room Deal? - Cramer's Mad Money (10/10/08)

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Includes: BAC, BP, C, DUK, FCX, GM, GS, JPM, K, KBR, KHC, KMP, KO, MDLZ, MO, MRK, MS, NUE, USB, WFC, X
by: Joan Wickham

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Friday, October 10.

Late Rally - Citigroup (NYSE:C), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), JP Morgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS)

The government’s best way to sustain Friday's late rally is to cut a back-room deal with the largest banks and brokerages to get them to start making loans again, Jim Cramer told viewers. On a day when Dow closed down 128 points after an extremely volatile session that saw an unprecedented 1,000-point swing, Cramer said this "secret" meeting is necessary to get the economy, credit markets and stock markets rolling again and avoid a repeat of this past week's brutal market. Cramer said he would have the Federal Reserve take the initiative by inviting to the meeting large financial institutions such as Citigroup, Bank of America, Wells Fargo, JP Morgan, Morgan Stanley, and Goldman Sachs, the latter three which he owns for his charitable trust. Cramer said the Fed would tell these financial institutions that it would not repeat the mistake it made when it allowed Lehman Bros to fail. Instead, he said, the Fed would do all that it can to get them "open for business" again. He said the Fed would guarantee all their debts as well as their brokerage, savings and corporate accounts. Furthermore it would allow them to pay off their bonds with federal money, allow them to sell their credit default swaps lower and provide them $100 billion each to lend. In return, these institutions would have to live up to their end of the bargain by "opening the spigots" and make loans again. He said the loans will be targeted to corporations, small businesses and individuals -- but not hedge funds.

Rent Some Stocks - Kellogg (NYSE:K), KBR (NYSE:KBR), Kraft (KFT), Heinz (HNZ), Coca-Cola (NYSE:KO), Altria (NYSE:MO), Merck (NYSE:MRK), Nucor (NYSE:NUE), Freeport McMoRan (NYSE:FCX), Kinder Morgan Energy (NYSE:KMP), BP (NYSE:BP), US Bancorp (NYSE:USB), Duke Energy (NYSE:DUK)

Cramer said that after the market's worst-ever weekly drop it's "time to change our incredibly negative bias," as stocks are no longer in endless sell mode. For Cramer it's time to "rent" some stocks, with a look at owning longer term if the market again approaches the lows seen on Friday. Cramer believes the market will chase those lows since the market rarely bottoms on a Friday, and the snapback by stocks was "too far, too fast." That means a new game plan is needed for the cash that Cramer told traders to peel off last month. Expecting a gap down on both Monday and Tuesday, Cramer advises putting 25% of that cash back in play on both days. As usual, Cramer is against buying all at once. As for where to put it, Cramer offered a stock like Kellogg as a template, based on its rallying behavior a year after the 1987 crash. Of course, Cramer said this isn't 1987 - times are a lot worse. Given that, Cramer suggests looking at companies that are trading around their cash on hand, such as KBR. You should also look at companies that make products that you eat, such as Kraft, Heinz, Coca-Cola and Altria. Cramer owns Kraft and Altria in his charitable trust. Cramer also likes giant pharmaceutical Merck, cyclical plays Nucor and Freeport McMoRan, which he also owns for his charitable trust, but reminded viewers that you only want a small position with the last two, since they aren't self-financing. For oil plays, Cramer likes Kinder Morgan Energy, with its 9% yield, and BP, although oil is still going down. Cramer would be careful with financials, but he likes US Bancorp, and threw in a recommendation for Duke Energy. The new leadership is companies that don't need money, Cramer said.

1987 or 1929? That is the Question – U.S. Steel (NYSE:X), General Motors (NYSE:GM)

Cramer likes that traders dodged a bullet on Friday, with a "spectacular" rally off the lows of the morning, but he believes it's important to lay out the worst-case scenario so investors can go forward "with their eyes open." Keep this in mind as next week starts. Cramer can’t decide if this market is closer to 1987 or 1929, but he’s pretty sure bad news from Morgan Stanley and the lack of good news from the world’s industrialized nations could cause a sizable drop in the markets on Monday and Tuesday. The Dow could go as low as 5,886, he said. That’s what happened during the crash of 1987: The Dow lost 508 points from Friday’s close to the session-ending bell on Black Monday. Then Terrible Tuesday saw an intraday low 339 points below that before the market turned up. In the worst case, the model isn't the 1987 market crash, which saw equities bounce back only a year later, but a "1929 scenario" which brought an 89% peak-to-trough drop and a "decline that just wouldn't quit." In that model, Cramer said, currently flailing stocks like U.S. Steel and General Motors wouldn't be done yet. Cramer said that unfortunately the parallels with the 1929 crash are too close for comfort. As in 1929, he explained, we have a presidential administration that's in over its head. Listening to Bush say the government taking necessary actions to solve the crisis is like President Herbert Hoover saying then that the worst is behind us. Cramer noted the market's tanking after Bush's most recent comments about the market, as well as the similarities of a Federal Reserve too focused on inflation and a wave of bank failures. Cramer said he believes the federal bailout plan can help, but that a second Great Depression is still on the table. “That's why you have to be careful with your buying," he said. So the message here is caution. Cramer wasn’t assuming another Great Depression is coming. He just wanted to investors to be careful if they buy stocks next week. Cramer had said that there might be buying opportunities if the market dips enough. But regardless, buyers don’t want to jump in with both feet.

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