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Don't Put Your Faith in This Commodity-Led Rally

Posted at 10:42 a.m. EDT on Friday, Oct. 9, 2015

The leap-of-faith rally in commodities is driving this market. So if oil takes a downtick, the market will take a downtick.

I typically don't like a commodity-led rally because that is too reminiscent of what happened in the runup to the great recession.

This rally, however, is about the production cutbacks, not increased demand -- which, frankly, is almost nowhere to be found.

Take this morning's news. We have Glencore (GLCNF)  blinking and cutting back zinc production. That's huge. Everyone in the zinc business was waiting for everyone else to blink. Now the cutbacks can happen across the board.

Don't be surprised if we get the long-awaited cutback in iron ore. That metal's gone insanely low, because Vale  (VALE) - Get ReportBHP Billiton (BHP) - Get Report and Rio Tinto (RIO) - Get Report, which basically control the market, have refused to cut back. The zinc production cut could serve as a prelude to that iron ore cutback.

Copper has been climbing -- in part, because Freeport-McMoRan (FCX) - Get Report has decided to slack production.

And this morning, International Paper (IP) - Get Report announced it is exiting a coated board business in China. That is a big change for an industry that seemed to think that business in China would grow sky-high.

Realism is setting in. China's not coming back any time soon. If you go over the latest Alcoa quarter, you will feel the same.

Funny, these companies were all over-producing as China's growth rate collapsed. It is easy to reach the conclusion that they will be as wrong, this time, with their cutbacks as they were with their overproduction.

Either way it is good news for stocks that haven't had a moment's respite from the downside for ages.

To be sure, though, it is supply, not demand, that is driving these stocks higher.

At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, held no positions in the stocks mentioned.

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Alcoa Reveals the Truth About China

Posted at 6:58 p.m. EDT on Thursday, Oct. 8, 2015

Tough moment. Really overbought. The most of the whole year. We have seen outsized gains in so many stocks in the materials segment, even as we found out tonight that China's doing even worse than we thought.

That was the real takeaway from the Alcoa (AA) - Get Report quarter, from what I can see. CEO Klaus Kleinfeld made huge slashes in production for the country, so big that you can see why so many are saying that this time it must be different and the Chinese have to do something serious to get the economy going.

I felt the exact same way when I read founder Jack Ma's letter about the poor performance of Alibaba (BABA) - Get Report, where he left the door open for what could be 5% GDP growth.

So the question is, what will people do in the chasm of reality? Will they hold on no matter how bad China is because these stocks could be coiled springs? Or do they say Alcoa dropped on a horrendous number so they will all drop.

I think the value move has legs and people will see through the valley. I don't think the move is over. Alcoa will, of course, go down, but I don't think it will give up most of the gains it has made since the split was announced.

But here is something worth pondering: If you owned just the commodity side of Alcoa, the part that's a low-cost producer of bauxite, that is, coming down the cost curve for the raw product, would you buy it expecting that China's at a trough? Because if you think that, remember the split's going to take -- earliest at least -- seven months to enact. That might mean it is worth it to start buying it under $10, recognizing that when Precision Castparts  (PCP)  no longer trades, people will be reaching for an analog and they will grab Alcoa and just accept that they have a division that might not be so hot, but might not get any worse than it is.

In other words, even as Alcoa looks like it is headed down the rabbit hole, I think there will be a momentary reset about how much one might like Caterpillar (CAT) - Get Report or Freeport  (FCX) - Get Report, but that, in the end, the value buyers are in charge in this market and they aren't going to pass on this opportunity.

At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no positions in the stocks mentioned.