Nobody expected anything good out of Washington for the stock market. We were wrong. This change in the law that removes irrational barriers for financial services is very important because these stocks, if left to their own devices, really can't stage much of a rally. But with this new legislation bringing down
, an outmoded protection system turned racket for underperformers, the insurance and banking segment could get a sustained lift. There is too much potential for takeover next year to allow much shorting to go on in this group.
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I have avoided this group all year, and it has been dead right to avoid. The valuations have gone down, the values getting further obscured by a yield curve that makes it very hard for companies that lend out to make a lot of money. Short-sellers have feasted on the financials as never before, as consolidation fears were virtually nil and earnings momentum nonexistent.
This tearing down of the barriers has promise, however, for two double-whammy reasons. The first is that the insurance industry and the banking industry, by themselves, have way too much capacity ever to get where gross margins can improve. These folks are always battling each other for share and giving away services that they could charge for if there were fewer players. Secondly, by allowing them to combine, you rationalize and take out costs and capacity at the same time. In other words, earnings estimates will go up.
What does it mean for the stocks? There were so many people short these stocks going into the government's surprise move Friday that there was panic short covering all day. Let that take its course. Remember, the yield curve hasn't gotten better, so the earnings prospects haven't brightened one bit. This morning's hawkish
statements make the near-term betting even tougher.
I would expect that this whole group retreats this week. Most of the moves are unsustainable without a rash of takeovers happening this week, and that's not going to happen. In fact, because of Y2K concerns I don't think it will happen until early next year.
But as the stocks come back, pay special attention to companies that are trading at lows and cheap valuations to book, which means that they can be acquired without wrecking the acquirer's earnings prospects. The insurance companies that offer annuity products will be likely targets because banks understand that business and want to offer that line extension. (Many do already, which is one of the reasons why we needed this change in the laws. Nobody could figure out who could do what.) And don't overlook the possibility of another takeover bout for the savings and loans that have been such miserable performers all year.
For us, we decided Friday to go long some longtime underperformers, starting with
, where I took a big swing Friday, and some of the low-cost brokers, all of whom are at 52-week-low territory. The latter seem particularly interesting to us given that the stock market has enjoyed a resurgence in volume and after-hours trading is definitely picking up. Bank One took the most guts for us to buy. That earnings report was a total nightmare. Is there a division of this bank that is performing on plan? But most of the bad numbers could be behind the company, and management is showing signs that an end to underperformance is at hand by punishing heretofore-blessed managers.
In the meantime there is that nifty 5% yield that will make the pain of dead money -- to me the biggest danger here -- more palatable. As these stocks fall back on profit-taking all week, I will increasingly focus on the values that exist in the sector. I know value is a boring word for all of you fellow
lovers, but there is more than one way to make money in this market.
(Mea culpa note: I did not know a compromise could be reached on this legislation. It was the type of factor that, had I known, of course I would have been less bearish on the group. I guess that is one more reason why it pays to be open-minded and not a permanent bear.)
Kudos to Art Director
and the hard-working redesign team at
. The look is much better, easier and addresses very specifically the type of stuff that buried us in the
online survey this week. I told my team at
that we should start looking through these other Web sites to see if they can make you money. Unfortunately, those criteria, which I think have real traction, never get focused on in these rankings. I guess profit is a quaint notion among journalists...
Message boards are all cleaned up now that the two guys who penetrated the system and tried to bring down our boards have been broomed. I can't believe how brilliantly devious these two anti-TSCM'ers are. They flood the boards with opprobrium under a host of different free names they use (of course they don't pay, they just take advantage of the 30 days free over and over again -- have they no shame?) and try to drive out the good with their vicious personal attacks. This weekend, as I was battling these people to retake our boards, my wife said: "Why bother? It doesn't do anything for you."
I loved that quintessential no-win moment: The seditious bad guys are claiming that I come to the boards for my own personal gain, and my wife, who actually knows the real deal, can't figure out why I bother to waste my time because it won't help us personally! The reality: We are coming the closest I have seen to real community on the Net about stocks. No, we are not charging for our own research, a la that
thing that sounds like a
for venture capitalists. And we are not simply cheerleading stocks. We are trying to get at what the real analysts -- those who use the products or are familiar with them -- use to better value securities.
If I can analogize, we are taking
One Up on Wall Street
a step further. We are allowing those who could not go to the Net infrastructure mall to find out, or browse what users think. We are creating a place to learn first-hand, without investment banking heat, what works and what doesn't. That will give
still one more way to make money for its readers. Remember, that must always be the litmus test. Otherwise, why bother?
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Bank One and Sycamore. 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