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Cramer on the Anatomy of a Bad Trade


To all of you negative, gloomy-gusses out there who despise my enthusiasm for this tape and want so much to bet against it -- and me -- let me give you a sobering story of bear reasoning gone awry.

Yes, it's time for one of my favorite Wrong! installments: the anatomy of a bad trade, a trade you didn't make, but one you certainly can learn from. Be sure to photocopy this horror show and share it with friends!

The guilty trade got put on two months ago, during one of those incredibly downbeat East Asian scares. It was put on as a hedged bet against a lot of other trades, so it wasn't done in complete lunacy. But nonetheless, it stacks up as a gigunda loss, one that definitely will make the 1998 lowlight film.

First the background.

I love the American banks. I have a long-term thesis, articulated here many times, that given our banks' strong capital positions, aggressive deployment of the best technology, and our nation's strong currency, the U.S. banks are dramatically underpriced versus their peer foreign banks. Heck, I feel so strongly about this thesis that I wrote it up in my monthly


column this current issue.

Periodically, such as when the soon-to-be-retired Wrong Way George Salem, downgrades these big bank stocks, their performance can be downright abysmal. (See my "George Salem creates a bottom in the bank stocks"

piece.) After the last big downturn, I decided I had enough of this volatility. I was going to capitalize on it. I was going to balance out my outsized money-center bank positions with a short of a foreign bank that seemed overvalued versus its U.S. counterparts, and had much worse exposure to East Asia.

I searched the world and came up with

ING Barings

, the Dutch company that because of legacy work in the old Dutch East Indies (Indonesia) stood to lose the most from a decline in that country. Frankly, ING seemed like a pretty decent bank to me, but given its geographic concentration in that area -- far greater than the banks I am long -- I figured that this stock had to go down more than my banks if East Asian stays a negative focus in the mind of the market.

I bought a slew of March 50 puts when the stock was at $45, close to its recent lows, but well above where it had traded in the past year. And I sold short common stock with a basis of about $46, after I had finished buying the puts.

I then proceeded to watch one of the greatest, most powerful sustained runs I have ever seen a stock take, a veritable

Eveready Bunny

of a run that, until yesterday, when the stock was off a couple of eighths, kept going and going and going.

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Now, with one day left before expiration, I face a total wipeout of the March puts and I have brought all but 15,000 of the short shares for an absolutely positively hideous loss. I will cover those 15,000 shares in the Netherlands before you read this piece. And they will take me down from that windmill that I've been strapped to for the past two months.

Now, bruins, if ever there were a trade where I should have made big money, it was this one. Subsequent to my ING purchase, Indonesia unraveled before my eyes. The


regime suffered through food riots, family scandals, a misplaced currency board, a thumbing of its nose at the


, and several runs at its treasury. All since I put on my position! The loan situation there has gone from precarious to comical. These loans may never get repaid.

And yet ING subsequently has spiked 11 straight points. Virtually in a straight line. In fact, the stock never traded a dime lower than where I shorted it. If you call up the chart, using


, you will see what looks like a perfect v-shaped bottom, and the very tip of the v, right there in that nasty, steaming fulcrum, you will find my fund shorting ING. If I were a technician I might even call it a perfect "Cramer" bottom (not

Cramer Berkowitz

, by the way, as he had nothing to do with this trade).

What happened? First of all, my reason, East Asian turmoil, became just another discounted item at the same time that I put the trade on. The sellers of these stocks, fearful of a collapse in that region, had finished selling. At $45, the Indonesian disaster got "priced in" to the stock.

But the buyers were seeing the other side of the trade, that the decline in East Asian business activity could mean the decline in worldwide interest rates, including those rates in which ING makes its markets.

These buyers didn't care that ING's percentage of Indonesian loans as a percentage of loans outstanding was extremely high, much higher than virtually every U.S. bank. They also didn't care that other aspects of ING's Asian business were also crumbling. They knew that the chief engine behind the surge in bank stocks, any bank stocks, is interest rates and a decline in worldwide rates can do a lot to smooth out the rough edges of credit delinquency problems.

Why didn't I cover earlier before disaster struck? For one, as I did my checks, the situation in Indonesia grew worse. If anything, had I not sensed a disaster in the making, I might have put even more stock out. The bearish logic I hear constantly on television, in the papers and from many of you readers would have me throwing Berkowitz into Krakatoa to please the god of losses by now.

Secondly, I knew I owned my existing U.S. longs and if ING did well, these should do even better (partially true). This is the old betting-against-yourself conundrum that I hate so much. Oh don't worry about your ING losses, the


position will take care of that. Greeeatttt! As if my job is to balance losses with gains, and not to make money. Finally, it was a foreign stock and most of the big moves occurred overnight without me. I didn't even have time to cover. I was busy sleeping, something I don't like to do, but find my body forcing me to do.

Internally, this ING position became something of a sour joke on me, as Jeff would routinely ask me, as part of our loss avoidance discipline, why we were still short it, and I would say, oh because the situation has gotten much worse. In fact, yesterday, when I covered the bulk of the short, taking advantage of that teeny-tiny decline, the Indonesian situation seemed to be taking a turn for the worse, courtesy of Japanese indecision.

But now, the pain is almost gone. The short is tamed. The puts disappear painlessly tomorrow. Relief is at hand.

I point all of this out because, in the end, I think I got tired of hearing of the worsening Asian crisis and felt like I had to take action to protect myself. My action made a ton of sense at the time, but lost me a ton of money.

What really occurred here in this massive loss? Quite simply I was too negative and stayed too negative. And I paid for my negativity. Dearly. Oh, and to the gentlemen who sold me those puts? My hat's off to you -- you beat me at my own game.


Random Musings:

Glad I didn't muff that CLEC

call. Talk about a white-hot group. Like watching


over and over again!

Time to remind everybody, you have an individual stock you want to discuss, don't send it to me, I won't respond. I don't advise individuals. Lately those who send me these get back some wise-ass crack like "Do I look like your broker?" along with the boilerplate language of my not offering investment advice to individuals. Spare yourself the sting and send those emails elsewhere. Also, those of you who think I am Karnac the Magnificent and want instant prognostications on demand, stick it in your

Funk & Wagnall's


Thought I had the home run, short




, going into yesterday's session, after Bay blew up. But, hoo-hah, joke's on me: Got crushed in my Bay short and toasted in my Cisco long. Found myself muttering,

Barney Fife

-like, whether it was Cisco that blew up and Bay that was taking share. In my daughter's first-grade class they call it frontsy-backsy day. In my shop we call it a big loss.

James J. Cramer is manager of a hedge fund and co-chairman of At time of publication his fund is long Cisco and Citicorp, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Mr. 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 welcomes your feedback, emailed to