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Jim Cramer's Best Blogs

Jim Cramer

• the Fannie/Freddie bailout,
• the shorts' handbook, and
• lack of foresight.

This Bailout Is a Big Piece of the Puzzle

Originally published on Monday, Sept. 8, at 9:35 a.m. EDT

The biggest canard of all: "This is not going to be a cure-all, nor will it solve the 'real problems' of the U.S. economy." Why is it a canard?

Because no one -- I repeat, no one -- is saying it is. Not even the biggest bulls.

This bailout of Fannie (FNM Quote) and Freddie (FRE Quote) is a piece of the puzzle that is meant to stop house price depreciation. It is one of the major pieces. Mortgage rates are being called down big this morning, big, with some mortgage brokers thinking we will lop a full percentage point off of rates. In case you think they are biased, these people had been forecasting a big gain in rates.

What's driving me crazy here is the falseness of the critics. They are all assuming that things won't be happy. It is about being happier.

Let's take Bank of America (BAC Quote) and Wells Fargo (WFC Quote). These changes are huge for them. If you owned them, you are going to make a lot of money. Why? Because the competition just got diminished, and the company that was making them pay more for money is gone.

No, that doesn't cure their bad loans. It does make it better!

How about the option ARMs exposure of a Downey (DSL Quote) or a Washington Mutual (WM Quote)? Not much. Those are failed institutions with big deposit bases. Someone will buy them, but they are part of the problem that won't go away, because those home loans are 100% loan to value, so there is no equity in homes. Many of those people will lose their homes, but if Treasury/FNM/FRE gets those loans, they can give them a 20% mortgage haircut which might be enough to cover the decline in some parts of the country.

The most important change: We had seven dying institutions -- AIG (AIG Quote), Ford (F Quote), GM (GM Quote), Washington Mutual, Citigroup (C Quote), FNM/FRE and Lehman (LEH Quote). The prospects of LEH or AIG to do a Merrill (MER Quote) deal is better than before. That would leave just a handful that need bailing or closing, and you know that GM and Ford will not be closed -- they are too big to fail. Again, that's better than what it was.

That's the win.

Random musings: Bulls, bears and pigs -- the pigs who stayed short Ambac (ABK Quote) and MBIA (MBI Quote), amazing. ... Possible big winner here: HSBC (HBC Quote) -- they can take over WaMu when that company can't raise the cash.

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

Behold: the Short Handbook

Originally published on Tuesday, Sept. 9, at 12:30 p.m. EDT

One of the bears' best arguments is that we have far to fall if the world's in recession. There is an abiding sense that when things unwind, there will be no wealth created at all by the commodity boom we have experienced and that the whole move has repealed.

So I went back to take a look at when the commodity boom really took off -- April 2005 -- just looking at the charts, mind you, to see what awaits us if that's the truth. That's a somewhat arbitrary time, but I think some of the negativity comes from the notion of a giant top that formed in 2008 with China's ascendance, and a catastrophic decline coupled with the Chinese collapse.

I think, to give the bears their due (as they certainly deserve it) that you can expect some stocks of some segments of the economy to have drastic falls from these levels, notably the mineral, oil, infrastructure and steel segments. So let's take a look at what a total wipeout of the gains -- that's right, no capital gain creation for the companies and shareholders -- would mean. (That's not a small amount of the component here given the meager dividends these companies pay.) I will use common, everyday representative companies as the examples, all considered to be in the throes of a horrible bear market.

First, there are the minerals. Let's start with Freeport (FCX Quote). I think one of the reasons people keep selling this one is a sense that copper is abundant, and the marginal buyer -- China, with 30% of the market -- has just vanished. If you repeal the whole move, FCX goes to $36, a substantial decline from these levels, but a stunning decline from its $127 high. That's like 2000 to 2001 on the Nasdaq.

It's not just copper. Vale (RIO Quote) (or RIO, as we know it) started at $7 and traded as high as $44. If we retreat to that level, RIO's obviously a tremendous short.

U.S. Steel's (X Quote) representative, too. It launched its fabled move from April 2005 at $49 and rallied to $193. Another great short if the move gets repealed.

On the other hand, Alcoa (AA Quote) -- a terribly managed company -- makes for a terrible short: It's where it started after round-tripping from $47. As a potential forecaster of the group, though, it would be deadly.

Oil and gas would also be amazing shorts: Schlumberger (SLB Quote) took off from $34 and traded as high as $112. Did it create any value here? I thought it did, but maybe not 3 or 4 -- perhaps 2 times, slightly more than the amount oil has increased? Call it $70, and you still have a good short.

Exxon (XOM Quote) and Chevron (CVX Quote) have been terrible performers of late, but you would still short them down to $59 and $52 if you repealed the move. Again, with oil up almost twice what it was back then, it seems a little ridiculous not to have seen an increase in value at all, but that's not what the bears would say is in store for us.

The truly great short would be Apache (APA Quote) and its ilk. Apache's discovered a huge amount of natural gas, but natural gas has been flat for the period, so roll back more than 50% to $59. Is there any wonder the stock's been under a monster amount of pressure?

The flip side is the chemical business -- giant user of natural gas -- and here, using this methodology, you are safe: Dow (DOW Quote) was at $49 and Du Pont (DD Quote) at $44. Stable with dividends and big declines in raw costs? Bad shorts.

Coal's been carried up with petroleum, and if you think that no value's been created here and oil is going much lower, then these are fantastic shorts: Peabody (BTU Quote) down to $20 and Arch Coal (ACI Quote) to $22. Their declines from the highs are severe, but the next leg would be even worse.

Coal travels by train: Look out, Union Pacific (UNP Quote) is going to $34 and CSX (CSX Quote) to $30 and Burlington Northern (BNI Quote) to $46. Again, this is if you think rails have created no value and have no particular competitive advantage. Rates would be rolled back and costs are going up, so that would be devastating -- I don't know if these prices are representative, but it is reasonable in the bears' view that nothing was created. Infrastructure's way overvalued if you roll back the move that started a little more than three years ago. Fluor (FLR Quote) traded at $29 -- monster good short, and that's the best of the group. Caterpillar (CAT Quote) would recede to $41: excellent short. Deere (DE Quote) would get cut in half to $32 -- if, of course, you believe that the inventory declines in food and the switch to ethanol will reverse.

The best short would be Potash (POT Quote), which launched right about then at $30. That's a tempting one (perhaps done against Terra Nitrogen (TNH Quote), which has a good dividend, if you are worried). Agrium (AGU Quote) was at $20, by the way. I have to admit -- even after these declines, I don't know if I could resist shorting these based on their charts, even though the fundamentals seem darned great.

Aerospace gets peculiar: Boeing (BA Quote) may have peaked at $107, but it began its run from $52. I don't think that Boeing's created nothing; in fact, it has created a whole new aircraft with great orders. But it's shut down by a strike, so why not short it down to there? Honeywell (HON Quote) began this move at $38, so not much downside, but still decent. United Tech (UTX Quote) started at $49; again, lots of room down. GE (GE Quote)? Bad short -- began at $27. Total round trip.

About the only area that has nothing really to fall from is tech: Intel (INTC Quote), $20; Microsoft (MSFT Quote), $25; Cisco (CSCO Quote), $18. Only Oracle (ORCL Quote) from $12 and Hewlett-Packard (HPQ Quote) from $21 seem vulnerable through this thesis, and H-P's been transformed and underearning. I guess I would short Oracle until the cows came home. Tech didn't blossom with the emerging market romp, so it probably won't sink with it. IBM (IBM Quote), by this nature, seems interesting -- it has transformed itself from hardware to software, and yet it started at $88. I know a lot of people want to short it, though, as a shortfall candidate. EMC (EMC Quote), by the way, is unchanged, despite the creation of VMware (VMW Quote), but lately that's looking pretty worthless, still a counterintuitive short. Nokia (NOK Quote) has 4 more points to fall by this methodology.

To me, this exercise is enlightening. While the prices we have seen in many of these stocks have plummeted with China and the forced selling of hedge funds, if I were an inveterate bear and I believed that nothing was created -- and the only thing most of these companies have done is buy back stock at what now are clearly stupid and ridiculous prices -- I would lay these out on any bounce. The fertilizer companies just seem like naturals, and I would actually recommend their shorting right here.

What needs to go right for all of these shorts, of course, is worldwide recession, which seems pretty likely, and an end to China as a growth engine. Who knows anymore.

Either way, consider this the short handbook based on the charts and a repeal of the move that began with worldwide growth exceeding U.S. growth, and the rest-of-world thesis/BRIC thesis. A repeal would be devastating, of course, and the bears would still coin money from these levels.

On Friday, I asked what would make the bears less bearish, and I got some answers. But I think I have discovered the real answer: the total and utter destruction of the wealth created by these stocks in the last three-and-a-half years.

Bears, I believe you will be bulls if and when it is accomplished. Or, at least, not as bearish as before.

At the time of publication, Cramer was long Cisco, Hewlett-Packard, Deere and Freeport-McMoRan. Jim Cramer is a featured commentator for CNBC, which is owned by General Electric; as part of his contract, Cramer holds restricted shares in GE.

Where Was the Foresight on Lehman and WaMu?

Originally published on Thursday, Sept. 11, at 9:28 a.m. EDT

A world without Lehman (LEH) or Washington Mutual (WM) will not be a better world. I am not coming with some silver-lining nonsense. All of the other players will benefit when it happens, but that benefit can't be felt until all of the chaos is sorted through.

The idea of a "plan" for these two, so obvious after Bear and IndyMac, isn't even on the table, let alone something to execute. We know that the books of both are so meaningless -- thanks to an SEC that has pretty much given up its mission -- that we must experience a huge amount of pain as these two are sorted out. Then we will have to be ready for AIG's (AIG) collapse, which won't be long.

Lehman's happening a tad faster, but that's now obviously because it was a terrible underwriter in Europe.

It's pretty amazing that in the end, bad mortgages -- issuing them, packaging them and then getting stuck with any or even buying them (as I think Lehman did when Erin Callan ran the firm) -- meant the end for these firms. Mortgages.

They had such faith.

When Lehman was corralling people in the media to tell them the shorts were pushing them down, I wanted to believe them.

But this Lehman Brothers was more of a Novastar and a New Century Financial, an issuer without a deposit base, like Bear.

Washington Mutual's more outrageous. It suspended its underwriting standards to take nationwide share. It was simply out of control.

In each case, the blame goes squarely on the leaders, Jimmy Cayne, Dick Fuld and Kerry Killinger. They wrecked their firms. They disgraced themselves.

Now, because of the velocity of these collapses, we have to go down huge. We had to manage the black holes slowly to make things work.

We didn't.

There was no plan.

And now, all financials will have to suffer the consequences, which when coupled with the oil futures signaling no demand will mean lots more money lost before the black holes are filled.

I know all of this, in the end, will be huge for Goldman Sachs (GS) -- that's Lehman's ultimate competitor -- and Wells Fargo (WFC), the big winner against Washington Mutual.

But first we have to get there.

At the time of publication, Cramer was long Goldman Sachs.