Commodities Hit by Deflationary Madness

Deflationary madness. That's what we are seeing. The unwinding of the big inflation trade now that everything has caught the deflationary bug: oil, gas, minerals, gold.

Here's the crazy thing: These inflationary groups have not only entered a bear market, the price action is so fast that they have been brought to levels that would normally have taken many months to deliver. We have gone, in some cases, from full-blown bull to full-blown bear as we got to the point where the hedge funds that are caught in the wrong stocks are unwinding positions at the exact same time.

Here's the issue. While these commodity stocks collapse and the early-cycle stocks take hold, we are in the bizarre notion where the oil stocks are trading to where they were when oil was at $80. As if oil is going to $80. As much as that would obviously ease inflationary trends, it will translate into, well, huge profits from these companies anyway.

Same with steel. Same with gold.

Now, we know from bear markets that you will get a dramatic overreaction to where we were last time when commodities fell -- check the charts of Freeport-McMoRan (FCX - commentary - Cramer's Take) and Yamana Gold (AUY - commentary - Cramer's Take) as examples -- but we are not, in my humble opinion, going to retreat to where these groups are going to go to horrible levels, because if we get a deflationary spiral we will also get a stronger economy ultimately, which will once again buoy these stocks.

Yesterdays' selloff was heavily related to hedge fund liquidations and to expiration. The hedge funds will finish their liquidation and we will get a bounce in these stocks. I would be buyer, not a seller, at these levels for the stocks that have already been cut in half (Foster Wheeler (FWLT - commentary - Cramer's Take)) or have more than 5% yields, which are great in a deflationary setting.

The other day I said that we could not buy the commodity selloff and that it would go on for three days. Here it is. If you own them and like them, buy some. If you own them and hate them, wait for the bounce and sell them.

And remember this: We are at the end of the interest rate cut cycle. The dollar can now advance. That's a negative for the stocks, but the commodities are priced globally, not domestically, which means you are not going to see massive declines in the underneath commodities and you will see a stabilization in the commodities from a return to some strength in the U.S. economy.

Random musings: Now all the bulls come out in the market because we are up. Yesterday they were in hiding. Makes me sick.

At the time of publication, Cramer was long Freeport-McMoRan, Yamana Gold and Foster Wheeler.

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