An Extra Hurdle

The destruction of things other than common stock, along with the destruction of the hedge funds, has made a mockery of picking common stocks in this environment. For most of my time on Wall Street I didn't worry about what the debt markets were saying about the stocks I liked. That's because the debt was almost always money good unless I was speaking of some sort of on-the-ropes auto sector company.

But ever since the government confiscated the Fannie Mae (FNM - commentary - Cramer's Take)/Freddie Mac (FRE - commentary - Cramer's Take) preferreds after telling us the entities were well-capitalized, and ever since Lehman's and Washington Mutual's preferreds were obliterated, investing in the common stock of a company that has debt outstanding has become fraught with danger. Take General Motors (GM - commentary - Cramer's Take). We have oodles of GM debt trading in the 30s. Same with CIT (CIT - commentary - Cramer's Take)! Also, we have Citigroup (C - commentary - Cramer's Take) debt trading in the 60s, so I would not buy the common stock. The dislocations in the debt market are so severe that many common stocks are worth far less than people realize given these capital structure valuations.

I have emphasized in these pages and on my TV show the common stocks of companies that don't need financing to make their products, or to sell them to customers who don't need financing to buy them. That's because I want to avoid the morass where I am looking at the common and something's going on in the debt markets that is making the common stock an overvalued irrelevance.

Of course, with time and fewer seizures, money will warm to investing in debt again, particularly when the prices give you a much better return than the common and much lower risk. But we have to accept that most of the buyers of this stuff had required leverage to buy it to get super returns, and that's over. The only buyers will be cash buyers, and the prices of the debt aren't yet low enough to entice cash buyers who would rather just earn nothing until the smoke clears.

In other words, there is no dearth of money, there is just a dearth of money willing to be put at risk because, alas, the rewards have been paltry and the risk has been life-threatening. The risk isn't just from bad economics, it is from seizure by a seizure-happy government that was willing to risk taxpayer money to bail out Citigroup through a confiscation of Wachovia Bank (WB - commentary - Cramer's Take) common and preferred rather than let the private sector take care of the situation at a profit for all.

Random musings: Please read this great piece by Tony Crescenzi about money creation. Very helpful.

At the time of publication, Cramer had no positions in stocks mentioned.

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