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Cramer's 'Mad Money' Recap: Momentum Fund Fuel

TheStreet.com Staff

Click here for an archive of Cramer's "Mad Money" recaps.

The real force behind the current rally is the mechanics of the market, Jim Cramer told viewers of his "Mad Money" TV show Monday. That's what has driven the Dow to nearly 12,000, he said.

Contrary to popular belief, the market has not reached this level because of a combination of earnings and interest rates, or because people have just decided to start buying, or because oil has declined, Cramer said.

Although this "tremendous" rally is taking place, nobody is explaining the reasons behind it. Everywhere he goes, Cramer said people have been asking about what changed in the market and how it got to 12,000.

"Understanding the rally is the first step in trying to profit from it," he said.

The one factor that moved us up here is the simple mechanics, or the day-to-day ways in which the market operates. In this particular rally, the mechanics are being driven by one group of buyers: momentum funds, Cramer said.

In fact, the momentum funds are the most positive he's seen in several years.

"For the last five years, momentum funds had lost style, but with the turn in May they started coming back," Cramer said.

Momentum funds, which concentrate on trading off of market trends, "get in the game and take stock up without wasting time," he said. "They don't sit on the sidelines." And now they are back in full force and are "moving the market," Cramer went on to say.

However, this is not the only reason the market is up, he said. The other part of the equation is that "this time there is little-to-no supply up top."

"The sellers are gone, which means momentum guys are in control," Cramer said. "The rally is based on momentum players paying a lot of money for stocks to value players who don't want to sell."

After doing his homework, Cramer has determined that market players can get in before momentum guys "swallow it up," and buy the stocks that have been left behind and are still trying to "play catch up."

Some of these stocks are: Lowe's (LOW Quote), Alliant Techsystems (ATK Quote), Intel (INTC Quote), Nokia (NOK Quote), Honeywell (HON Quote), Parker-Hannifin (PH Quote), Graco (GGG Quote), WW Grainger (GWW Quote), Boeing (BA Quote), Emerson Electric (EMR Quote), International Paper (IP Quote) and DuPont (DD Quote).

"There has not been this kind of buy activity since 2000," Cramer said.

Five or Six Flags

After going to Six Flags (SIX Quote) six months ago and paying $147 for three people, Cramer told his viewers he was disappointed by the theme park.

As it was such a "bad experience," Cramer started wondering if there could be bankruptcy risk. Cramer said that because it pains him to see "such an awfully run business," he did research to investigate how bad Six Flags was as a company.

Upon doing his homework, Cramer found that if Six Flags bulldozed everything, the stock would go higher as it is "sitting on some of the finest real estate in America." In addition, he came upon a report by CRT Capital Group that regarded Six Flags as a strong buy.

Cramer realized that Six Flags is not doing as bad as it seems.

"First, don't entirely trust your senses," he said. "Second, think outside the box. A theme park can be a theme park, but it could also be a big chunk of real estate."

Six is a buy at its low price with a worst-case scenario of $6 up and $2 down, Cramer said.

Yahoo! Could Be Yes

Using Yahoo! (YHOO Quote), which he owns for his charitable trust, Action Alerts PLUS, as an example, Cramer showed viewers how to determine a fair price in a stock that's falling.

The first method is looking at the company's earnings, he said. Yahoo! reports Tuesday, and its earnings are a "travesty," Cramer said.

While people are expecting it to deliver 47 cents this year and 65 cents next year, he believes that these estimates are "too high" and that Yahoo! might even cut guidance for next year.

"It's a $12 stock masquerading as a $24 stock," Cramer said. "When it reports tomorrow it will be slaughtered."

However, there might be a bottom if it reports "terrible" earnings, he said. "If it cuts earnings estimates down to 25%, it has a shot to beat them."

Also, there's a chance that Yahoo!'s management is the issue, Cramer said. There were high expectations for its chief executive, but he's missed several opportunities to grow the company.

Yahoo! as a takeover target is the most interesting idea, he added. At this point Cramer believes that there are four buyers that would pay at least $30 a share for it: Microsoft (MSFT Quote), Viacom (VIA Quote), Comcast (CMCSA Quote) and AT&T (T Quote).

Based on the analysis, he recommended buying Yahoo! after it reports earnings.

Cramer welcomed Zan Guerry, Chattem's (CHTT Quote) chief executive, to the show. Chattem markets and manufactures over-the-counter health care products, toiletries and dietary supplements.

Cramer asked him what the company's deal to acquire brands from Johnson & Johnson (JNJ Quote) and Pfizer (PFE Quote) could mean for Chattem's earnings. Cramer owns JNJ for his charitable trust, Action Alerts PLUS.

"We think in our first full year, which is 2008, earnings will be up 75 cents to a dollar due to our strong brands," Guerry responded. "I think it was an excellent acquisition, and we paid a good price."

Guerry called the deal a "once in a lifetime opportunity," and said that by acquiring the brands, the company has probably expanded its presence by three or four square feet in drugstores.

Lightning Round

Cramer was bullish on News Corp (NWS Quote), Aircastle (AYR Quote), Lowe's (LOW Quote), J.C. Penney (JCP Quote), Kohl's (KSS Quote), Intel (INTC Quote), Crocs (CROX Quote), BHP Billiton (BHP Quote) and RealNetworks (RNWK Quote).

Cramer was bearish on Western Union (WU Quote), Sprint Nextel (S Quote), Wet Seal (WTSLA Quote), Nvidia (NVDA Quote), Flextronics International (FLEX Quote) and UnitedHealth Group (UNH Quote).

In the "Sudden Death" round, Cramer was bullish on JP Morgan (JPM Quote) and General Motors (GM Quote).

He was bearish on PepsiCo (PEP Quote) and Seagate Technology (STX 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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