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Cramer's 'Mad Money' Recap: Can Corn, Harvest Profits

TheStreet.com Staff

06/14/06 - 07:54 PM EDT
Click here for an archive of Cramer's "Mad Money" recaps.

Despite a 110-point jump Wednesday, Jim Cramer warned viewers of his "Mad Money" TV show that not everything is safe to buy -- in particular, ethanol-related names.

In fact, it is time to clear out of the ethanol stocks as soon as possible. However, sell incrementally, Cramer advised, not dumping everything at once. The ethanol fad has come to an end, he said.

Today, Verasun Energy (VSE Quote) went public. This is the first sign you need to sell, he said.

Several other ethanol companies, like Aventine Renewable Energy, are also on the verge of going public, Cramer said.

Soon the market will be full of ethanol stocks, and the prices in this sector will go down. Ethanol stocks are nearing a period in which there will be too much supply and not enough demand. It is in its last stage of a speculative-stocks-fad cycle.

Market players saw this with the dot-coms in 1999, and the power-merchant and the oil-service names too, Cramer said.

Cramer started recommending ethanol on "Mad Money" with the highest quality stocks, he said. First there was Archer Daniels Midland (ADM Quote) and The Andersons(ANDE Quote).

Then there was MGP Ingredients(MGPI Quote). When MGP's COO, Tim Newkirk, was on the show Tuesday, he said there was too much hype and even potential overhype in the ethanol market. (To view Cramer's June 13 interview with Newkirk, click here.)

Investment bankers are in on the game, and the secret is out, Cramer said. They are creating too much ethanol-stock demand. Ethanol companies are not bad companies, but Cramer believes they are going to stop being hot for good.

"The bottom line is that ethanol has become too celebrated to make you any more money," he said. "Don't wait much longer than a week to sell it."

Margins of Error

Everyone is talking about the Consumer Price Index that was released Wednesday, but Cramer believes people need to forget about it.

"If you are in stocks, there is one thing you need to think about," he said, "your fellow shareholders."

There are two things that would move any stock and they are buyers and sellers. Market players need to know who their buddies are. They need to know who is going to buy and who is going to sell.

As long as people know who their fellow shareholders are, they know where they stand in the market, Cramer said.

"I don't believe we are out of the woods yet," he said. "There are a lot of bears out there."

It's hard to be bullish in times like these. Hope needs to be crushed. It is not a part of the equation. The market is still full of bad shareholders. That means people need to stay defensive, he said, adding that he would still stick with the supermarkets stocks.

What defines a bad investor is anyone who borrows money to buy stocks, Cramer said. It's called buying on margin.

"The single most important indicator of the market is how much margin debt there is in the market," he said.

When there is a high level of margin debt, it is bad. And when there is a low amount, that is good and players should buy.

For stock prices to increase, people cannot be borrowing money to buy them, Cramer said. Artificial demand is not a good thing. These types of shareholders are your enemies, they are out to get you, he said.

Right now, not only has there been a lot of margin debt, but it has been increasing. Increasing margin debt is a very bad sign.

These types of shareholders are considered bad because people who buy on margin don't have much discretion as to when they have to sell their stock.

Also, since stocks are going down, margin players might not be able to put out the collateral, he said. If people can't pay, brokers reclaim their stocks. Massive selling equals a bad market.

Right now the margin debt in the NYSE is $50 billion higher than it was in 2005. The numbers don't lie.

"These numbers are discouraging for people who think we are near a bottom," Cramer said. "You need to watch this number like a hawk."

In a debt-ridden market such as this, you have to be defensive, not aggressive, until this number goes down. Cramer advised his viewers that if any of them own stocks on margin, they should get out.

Am I Diversified?

In this type of market you need to be defensive and you need to be diversified, said Cramer. That is how you protect yourself.

The first caller to participate in "Am I Diversified?," a segment in which viewers call in to have Cramer vet their portfolios for diversification, had the following five stocks in his portfolio:

Cramer called the portfolio "smacking good," saying a bank, a farm-equipment company, an oil company, a telecommunications company and a drug stock makes this a diversified portfolio.

The next caller owned the following stocks:

With an oil and gas, a mineral, a bank, a tech and a telephone company, this portfolio also got Cramer's stamp of diversification.

The final portfolio under the microscope consisted of these stocks:

Cramer said he would get out of Capstone and buy a health care stock.

Mad Mail

Cramer also reached into the "Mad Mail" mailbag and answered a viewer who wrote in to ask Cramer if Microsoft (MSFT Quote) fit the description of a bottom to buy into. Cramer said that he currently owns Microsoft for his Action Alerts PLUS charitable trust and he is getting killed. He did not recommend buying it.

Lightning Round

Cramer was bullish on Yamana Gold(AUY Quote), Goldman Sachs(GS Quote), Chesapeake Energy (CHK Quote), Yahoo! (YHOO Quote) and Broadcom(BRCM Quote).

Cramer was bearish on Harmony Gold Mining (HMY Quote), Hansen Natural(HANS Quote), Tellabs(TLAB Quote), GSI Commerce (GSIC Quote), Energy Conversion Devices (ENER Quote), Conexant Systems(CNXT Quote) and Waste Management (WMI Quote).

For more of Cramer's insights during the most recent Lightning Round, click here.

Want more Cramer? Check out Jim's rules and commandments for investing from his latest book by clicking here.

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