A Really Bad Sign: Multiple Compression

We are seeing multiple compression across the board. There are so many stocks that are selling at 11 and 12 and 13 times earnings that are quality stocks with really good businesses that it can only mean one thing: the recession is going to be really hard and really bad.

To use a visible stock, when Disney (DIS - commentary - Cramer's Take) grows at 13% and sells at 14 times earnings, you have to wonder how this discretionary spending story is going to play out. J.C. Penney (JCP - commentary - Cramer's Take) grows at 14% and sells at 7 times earnings. Guess? (GES - commentary - Cramer's Take) grows at 23% and sells at 17 times earnings.

You see this kind of severe multiple compression when all of the estimates turn out to be way too high.

Cramer: All Signs of a Classic Bear Market

Now, I know there are many areas of strength in this economy. In fact, if you eliminated Florida, California, Arizona, Ohio and Las Vegas, you'd see a decent economy, which is probably why Kansas City's Thomas Hoenig and Dallas' Dick Fischer won't bend on rates. But the issue, of course, is that you can't asterisk the decline, particularly because those are the areas of choked real estate that is causing the recession. There was just too much populace and growth in those states for retailers and housing companies to scale back from.

And Goldman downgrades Foot Locker (FL - commentary - Cramer's Take) and usual suspects on the macro call today including, more importantly, Nike (NKE - commentary - Cramer's Take). This is why I thought the Under Armour (UA - commentary - Cramer's Take) call yesterday was so dangerous.

Go through company after company. You will see what I mean; the multiples for all but health care are just dramatically small and getting smaller. Of course, retail is worse than everything, as the big numbers today can attest.

But it is a lead indicator, not a follower. It is why we are getting so many macro downgrades, meaning downgrades that are based on GDP growth not on individual performances of companies.

Real bad sign. No faith in the Fed by this point at all.

At time of publication, Cramer was long Goldman Sachs.

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