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Inside the War Room at Cramer Berkowitz on Friday

The trader details how a battle was lost, and how his fund set itself up to win next week's war.

Friday's session contained everything you need to know about the stock market. The action was textbook: All of the stocks that should have gone up did; all of the stocks that should have gotten clobbered, were. Not only that, but the whole session might have been preordained: The battle was over by 9:40. There was virtually no room to maneuver intraday.

So, let's go over how we handle such a morning at

Cramer Berkowitz


First, when you have a day decided by a macro event, in this case, the

Consumer Price Index

number, you can't be too cautious. As the last 1,000 points in the stock market could be pinned directly to a benign April employment number, we figured that any good CPI number could spark a runaway rally. But a bad number could be a disaster, as a high inflation number would spark worries that the


would tighten next week.

Good thinking!

Going into Friday, we had our eyes on two different keys: the bonds and


(ORCL) - Get Oracle Corporation Report

. We figured Oracle would be bearish, and because Oracle is a .com by its own advertising creation (and also because Oracle, the company, has a big mouth), nothing in tech could be safe for the next 24 hours.

When we make such judgments we take action ahead. We had cut back our tech holdings to a few key cores, (as I said on


Thursday) specifically avoiding large positions in personal-computer-related entities that could fall prey to Oracle's bad-mouthing.

That was our good fortune. Oracle set a negative tone, but it seemed almost irrelevant compared with the bonds. (In this session the bonds were so weak that all of tech got crushed.)

Unfortunately, I did not listen to Jeff about the bonds. (Also conveyed on the site, much to my chagrin later). They were up almost a point going into the number, so I figured I had a lot of room to maneuver if the CPI number was too strong. A point cushion's a lot in the bonds. You can take a lot of pain when you are up that much.

I don't have any money borrowed to finance our position (called unleveraged for newbies), so I was not sweating the bonds as I should have been. Still, the day before, Jeff had convinced me that given our bond position (roughly 25% of our portfolio) we didn't need any financial exposure in equities beyond our core

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

position (we vow never to sell it, as we are both Goldman alums and still revere the firm). We had axed





(C) - Get Citigroup Inc. Report


J.P. Morgan

(JPM) - Get JPMorgan Chase & Co. (JPM) Report

, as well as some smaller banks and financially sensitive companies.

At 8:29 a.m., we huddled around our machines, confident that whatever number flashed would be within our parameters to make money.


When megatonnage numbers like that CPI stink bomb hit the wires, they take your breath away. I tend to think in terms of battles and wars, because they, like, the stock market, are often decided long before the actual skirmish begins.

I felt a chill run down my spine, because, at that moment, I knew we were too long, too long everything. We were way too far north, and, with that image of a frozen north, I pictured myself up on the Yalu in Korea, the ChiComs about to overwhelm us. It is a picture of fright, knowing that you are dreadfully out of position, and there are 300,000 furious warriors about to drive the point home.

For me that meant contain the losses, retreat with minimal casualties like the Marines at Chosin, or get overwhelmed like the Army, because I chose not to recognize what my intelligence flashed, which was that this could be a disaster for the bulls. (In the

Korean War


Gen. MacArthur

ignored all intelligence reports that the Chinese Communists had massed to attack, and his arrogance cost many American lives.)

But how do you retreat without getting annihilated? How do you take losses, necessary losses, and be sure to still have enough on for any snapback rally?

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For us, that means getting off the desk and strategizing about what was right and what was wrong. We went into Jeff's office, turned the TV lower, and figured out the triage. One by one, I recited the names of stocks, and after each one we rated them a one, two or three. One means we want more no matter what. Two means we will buy on weakness. Threes means leave it behind.

The issue, of course, is at what price will a three go back to being a two? Let's focus on one of these and walk our way through it. (I am not going to detail my ratings, as that is the same as touting them.)

The stock I want to focus on is

General Electric

(GE) - Get General Electric Company (GE) Report

. We came in long 60,000 General Electric, an averaged-size position for us. When we were going over our positions, G.E., which had gone out at 110 the day before, got labeled a three. Why sell a great American company? Because my company isn't in the business of riding things down or taking a beating.

G.E. may make many industrial products, but what makes the G.E. engine work is its financial division. And what may spur its clients to buy bigger and more expensive projects from G.E. is lower interest rates. So this company is as financially sensitive as they get.

I told Jeff that this stock would open between 107 and 108, down a couple, and then trade lower. We all have our various skills in this game. I am known on the Street as someone who can, on the fly, determine what something should trade at faster than anyone else. This has always been my stock in trade, and, it is a skill that I am proud of.

In these meetings, that pricing judgment goes unquestioned. All we are trying to figure out is whether we should take the loss or average down. Because we rated G.E. a three, that means we wanted out. But if it opens below my 107, we will call an audible and figure out whether G.E. is now a two (buy on weakness) and no longer a three (jettison).

At 9:28, I get my first look at G.E. It's a bad one, showing that the stock is paired, meaning there are as many sellers as buyers. I repeat the look out loud and for a moment Jeff's face brightens, but I just shake my head. I know the look is wrong, too generous. This stock ain't opening unchanged, I tell myself. I ask for another.

At 9:29, with the bonds still tanking, I ask for another look. This time there is 50 to go, meaning 50,000 shares more for sale than to buy. The stock will be at 108 without me, if I elect not to sell.

I decide at the last second, right before I daily yell out "there goes swifty," at 9:30, to offload 25,000 of my 60,000 shares. I get a 107-and-a-half report, as I figured, soon after the opening of the market. I immediately cut loose the remaining shares, north of 107. Done. Loss taken.

At our shop, I don't really care about the basis of a stock. What I care about is where it went out the night before. My loss, of less than three points from the day before, is all I care about. I always use zero-based budgeting, meaning that I value my portfolio as it went out the night before. That keeps me from being wedded to something either because I am down on it, or because I am up on it so much that I don't want to take a gain. (Remember, I am a trader, and I am less concerned with taking trading gains than you might be as an individual, because I am basically a merchant of stocks.)

For me, the G.E. sale is a win, of sorts, like a retreat to a Victory of Chosin, as opposed to a rout. Sure enough, G.E. trades down relentlessly for the rest of the day and closes below 106, which would have been a big mistake for me if I hadn't taken action. My ability to take that loss and bounce back will allow me to play again.

Each position has a similar story. Take No. 1-rated


(AA) - Get Alcoa Corp. Report

. We pretty much expected that the sell programs would force this stock down. They did. We bought Alcoa when it was down about three-quarters. An hour later, it was up a buck and a half, as the cyclicals were perfect for this environment, and we knocked the stock out for a terrific gain on a bad day.

Or take No. 2-rated


(T) - Get AT&T Inc. Report

. We were prepared to buy more on weakness, which we expected, but the stock opened almost unchanged. That meant to us, call an audible on the desk and boot the T, because that opening was wrong, too high. Again, good call, as T sold off for the rest of the day.

Or No. 1-rated

MCI Worldcom


. We love this stock, but it should have been down because, it, too, is interest-rate sensitive. Jack Grubman, the omnipotent analyst from

Smith Barney

, pushed it very hard. That gave us a chance to sell the stock higher than it normally should have been. We love Worldcom, but not at 88, up a buck, when the rest of the market is collapsing, so we sold our Worldcom into the recommendation, confident that we could buy it back lower on Monday.

Right again.

These are all examples of attempting to make a bad situation, frankly, less bad. They are calculated to make us lose less than others, which is all you can do unless you are in cash or short on a day like Friday.

But then there were our bonds. From the moment the number came out, we knew we would be shellacked. I figured we would lose a point and a half and they would stabilize. That's about right, and I figured that industrial production, at 9:15, could give us a higher point to trim our holdings.


The industrial production number took a soggy bond market and made it waterlogged. The number fit entirely into a thesis that said the


would be nuts not to tighten. In short, we were "wearing" the bonds, meaning that we were stuck holding a bad position.

I told Jeff that we would do nothing with the bonds, because we had sold almost all of our financials, and we could take the pain better that way. That was an okay decision, not great, but it let us focus on opportunities in stocks.

Suffice it to say on this gruesome Friday, we were Marine-like in our retreat from stocks, meaning we salvaged what we could and will be ready to play again. What we did to G.E. we did to a half-dozen other stocks, raising enough cash to be ready for whatever bad Monday brings.

The opening prices were about the best you got on anything financial, and the cyclicals all popped as they were supposed to until programs overwhelmed everything. Meaning that if you wanted to salvage things Friday, you had to sell everything at the opening except the smokestackers.

Was it a critical session? I think so, because the bonds are now your enemy, and things are easier in equity land when the bonds are your friend. For us, the goal of Friday's session was to position ourselves much less bullishly for what awaits us the next couple of days. While we clearly lost Friday's battle, meaning we lost money, we set ourselves up to win next week's war.

Sometimes that's the best you can do.

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long Goldman Sachs. 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