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Confessions of a Former Bear

Tuesday's frantic short-covering reminds JJC of the days before the scales fell from his eyes.
Author:

Lotta bad money short out there. Unless you have worked at a hedge fund -- or

sat at the desk of one for that matter -- you have no idea how much money is run

against

the market.

Ever since I got in this business there have been giant pools of capital with people much smarter than I am who have made heavy bets against the market. Day in and day out.

What are they betting against? You and I might say they are betting against progress at best, or maybe chicanery at worst. But most of the time, they are just betting against you. They are betting that you will panic or that you will come to your senses or that you will recognize that you are playing with fire. They are betting that you will at last find out that it is all tulips or all smoke and mirrors.

They are betting that you will see it like they do.

Days like Tuesday are excruciating to short-sellers. I still think we are seeing the aftermath of that giant

DJX

put buyer, the one who bought enough that he knocked the market down with his buys. That guy has been positively drawn and quartered because, well, because of nothing. I think he might have been buying the underlying stocks against the Dow Jones puts to salvage maybe a shirt or two, or maybe a pair of socks, something so he's not naked to the world.

I remember when I used to make these bets. I would read

Barron's

and I would have my Steve Leuthold "I-hate-the-market" hat on, backed up by something solid like Steinberg at

Merrill

(who missed the greatest move of this decade), and I would be screaming at my screens, "YOU SHOULDN'T BE GOING UP!" You could always count on the P/E to be outrageous or the short interest figures to be not high enough or the price-to-book to stink out loud.

I always felt like such a smart guy! I was the snickerer at the parties, laughing at those hapless long sheep-soon-to-be-mutton. I knew the secret bearish handshake. Heck, I was the best, the brightest and the most-bearish -- the three Bs! I remember how comfortable I would feel after a real tough week, shellacked by the bulls, when I would pull up with

Abelson

over the weekend and chortle at how much money those long funds were going to lose. We were members of the club of rigor.

Man, was I stupid.

Just today I visualized my old moronic (yet rigorous and doctrinal) self back in September of 1988, when I hated the market, right before my wife and I got married. I was cursing at

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Intel

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for going higher. How dare these stocks rally in the face of disturbing fundamentals. Didn't these buyers know about the national debt? Didn't they know what the Tisches knew? Had they seen the savings rate declines? Didn't they know about the average-selling-price declines in tech? What fools these buyers be!

I wanted to short them their houses in the dunes at Amagansett and their

Beamers

and

Benzes

. Heck, I wanted to short them their apartments, a la

Jim Grant

, at those $200,000-for-two-bedroom co-op prices. I yearned to clean up on those nasty bullish boys, I'll tell ya.

But it never worked. Because the simple truth is that things aren't so bad and have actually gotten better over time.

Take this rally. The market had gone down in good part because of a backup in rates, and if that backup, which has been giant-sized and marked, is over, then it is safe to buy and all of the bearish cases will have been vanquished for now.

If you are short, of course, a return to normal rates means that you won't get that panic from the long-biased folk. You can't create the panic. Worst of all, after this week, there won't be anything macro to panic about. After this week, earnings take over, and it will be every bear's nightmare: The numbers should be great.

When you see the kind of mind-numbing ramps like we saw today, remember that there are plenty of people who bought into the doom and gloom and, rather than doing nothing, they took action.

Now with the averages screaming again, these hedge funds will be faced with angry investors who want to know how they lost money in an up market. These investors don't want to hear that the public failed to panic. They don't want to hear that you were short when you should have been long.

So the solution is to take the pain away. To cover. To sell the puts. I saw a lot of that today. Much more than yesterday. I saw shorts capitulating. You could open up an Ursine factory outlet, there were so many bearish towels thrown today at this market.

Somehow, after being an ideologue and having my head handed to me so many times in previous ramps, I found today's capitulation oh-so-satisfying.

Brutal and satisfying.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Bristol-Myers Squibb. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

jjcletters@thestreet.com.