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Cramer's 'Mad Money' Recap: Money Managers 101

TheStreet.com Staff

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

There is a select group of people known as money managers, and only they know how the market truly works, Jim Cramer said Wednesday on his "Mad Money" television show.

The mechanics of how a stock moves matter more than a company's fundamentals, Cramer said. There is no such thing as "the market." By the mechanics, Cramer means how the mutual funds act. In fact, the mutual funds might as well be the market because of the large amount of capital they control, he said.

"When you know how they act, you know the truth of the market," Cramer said. "Forget the fundamentals for the short term and think of the funds."

Mutual funds make money from fees, and that's how they profit, he explained. And the only incentive they have to beat the market is to attract more clients and thus more fees. The first thing short-term investors must realize is that mutual funds "buy relentlessly over time," Cramer said. As it takes funds a long time to build a position, it is easy for people to make money on a stock like Exxon Mobil(XOM), even when it already has moved higher.

The second lesson to be learned is "symbolism is incredibly important if you're running a mutual fund," he continued. A diversified mutual fund needs to have some oil exposure, but it doesn't need to own the best one, "just a stock that symbolizes oil."

That is why the mutual funds picked Exxon, Cramer said. Moreover, for the aerospace sector the anointed stock is Boeing (BA), Bank of America (BAC) is the anointed financial and Cisco (CSCO) and Apple (AAPL) are the anointed techs, he added.

The anointed stocks are usually good, but even the bad ones get a boost and allow people an opportunity to make money, Cramer said.

"Stocks don't go up or down based on fundamentals," he said. "Mutual funds decide where stocks go in the short term, not you, and if you know how they think, you will have a major edge."

Gushing

Exxon Mobil may be the "worst oil company out of the bunch," but it is still a stock people must own, Cramer said.

Cramer is "absolutely nauseated" by the fact that Exxon is leading the oil rally, especially because the company spends more money buying back stock than it does on drilling for oil. In fact, when he talks about all of Exxon's untapped reserves that it could be drilling on, it becomes clear to Cramer that Exxon should not be leading the oils.

In addition, he considers the company's exposure to Venezuela and Indonesia as another reason Exxon should not be bought.

"But at the same time, it must so clearly be bought," Cramer said.

Alaska recently turned down some of Exxon's leases to drill, but the stock is still up, he said. And on "Black Monday," when the market was down 150 points, Exxon was up.

The bottom line is Cramer may not be able to stand Exxon, but he still believes it's a buy because the mutual funds have been buying this stock.

Although people may be under the impression that Exxon is up because the price of oil is up, this is only a small part of why the stock has risen, he explained. If this were wholly true, then stocks like Chevron (CVX) and ConocoPhillips (COP) would be up as well, and that has not been the case, Cramer said.

The real reason why Exxon has gone up is actually "stupid" and has nothing to do with the company's fundamentals, he continued.

"It is on a roll because some large mutual fund families have decided they don't really know where oil is going but their portfolios need some exposure that has the look and feel of oil," Cramer said. "But they are also worried about having exposure to the commodity of oil because they don't believe in it."

Therefore, the mutual funds have picked Exxon, because this company doesn't believe in oil either and it shows by how little it's spending on oil drilling, compared with buying back stock, he said.

Mutual funds are huge and buy huge amounts of stock to set up their positions in a stock, Cramer said. Probably close to half the mutual funds out there are buying Exxon, so "go rent some until the year-end before it hits $100," he advised.

Are You Diversified?

In the "Am I Diversified" segment of the show, Cramer's first caller held the following five stocks in his portfolio: Cisco (CSCO), Merrill Lynch (MER), Walgreen (WAG), Halliburton (HAL) and Goldman Sachs (GS), the latter two of which Cramer owns for his charitable trust, Action Alerts PLUS.

With a pair of brokers in Merrill and Goldman, Cramer said he couldn't bless the portfolio as diversified. He suggested selling Merrill, even though he said it's a good company.

Cramer's second caller owned the following five stocks: Qualcomm (QCOM), Cisco, Nokia (NOK), Best Buy (BBY) and Federated Department Stores (FD).

"If we were playing poker, you would have a full house," Cramer told the caller. But in this game, he said he could not bless a portfolio with three tech stocks and two retailers.

He advised keeping Best Buy and Cisco out of the five, and suggested picking up a financial play, a health care stock, maybe a defense company.

The third caller named the following five stocks: Microsoft (MSFT), Saic (SAI), Walgreen, Sears Holdings (SHLD), which Cramer owns for his charitable trust, Action Alerts PLUS, and Google (GOOG).

Cramer recommended getting rid of Microsoft and keeping Google, as together they are a pair of tech stocks.

In his "Mad Mail" segment, Cramer told a caller that stocks tend to bottom six to nine months before the fundamentals show it. He went on to say he believes the homebuilding industry should come out of its recession when the Fed starts cutting, which it will.

But "if you're waiting around for the numbers to go up, you will miss most of the move," Cramer said.

Responding to another viewer, he said he was "severely disappointed" with Arena Pharmaceuticals (ARNA) and feels bad for recommending this stock.

Lightning Round

Cramer was bullish on Research In Motion (RIMM), Marvell Technology (MRVL), UnitedHealth (UNH), Darden Restaurants (DRI), Boston Scientific (BSX), Johnson & Johnson (JNJ), Toyota Motor (TM), Terex (TEX) and Halliburton (HAL).

Cramer was bearish on Palm (PALM), Micron Technology (MU), Burger King (BKC), Pier 1 Imports (PIR), General Motors (GM), H&E Equipment (HEES) and Sun Healthcare (SUNH).

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

In the "Sudden Death" round Cramer was bullish on Royal Bank of Canada (RY) and he was bearish on Cummins (CMI).

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