Jim Cramer fills his blog on RealMoney every day with his up-to-the-minute reactions to what's happening in the market and his legendary ahead-of-the-crowd ideas. This week he blogged on:

  • oil's decline,
  • the bifurcated banks, and
  • the SEC's dangerous ignorance.
Click here for information on RealMoney, where you can see all the blogs, including Jim Cramer's -- and reader comments -- in real time.


Oil's Fall: Econ 101

Originally published on Monday, Aug. 11, at 9:04 a.m. EDT

Nigerian rebels, Iranian saber-rattling, potential Israel-Iran war, hurricane warnings, Venezuelan meddling, Turkish pipelines, BP woes in Russia, all of these at one time have allegedly contributed to the strong oil price. Every time we rallied a couple of bucks, the usual suspects were rounded up and given credit for the rally.

And then the biggest actual ruckus of all -- a war between major oil producer Russia and Georgia -- rages on, and oil cascades lower into the escalation. LOWER! If this incursion were to rank with the parade of horribles that allegedly spurred oil from $90 to $148, it would be off the charts. It is the real deal that can interrupt pipelines and cause a calamity in the European market. It should have sent natural gas -- the Europeans live off Russian natural gas -- into the stratosphere, as it should have caused hoarding and a spike even here for recognition that no liquefied natural gas could come here because it would be needed so badly in Europe.

So why didn't it? From the beginning, I have said this is all economics: Supply wasn't able to meet demand. Supply wasn't constant -- it keeps dropping everywhere except Saudi Arabia -- but more important, demand did not slow down until the peak hit; at that point, which produced gasoline well above $4, we stopped using. We slowed driving incredibly. We carpooled, stopped taking excessive trips, turned in the SUVs and wiped out the most popular category of automobiles -- trucks -- overnight. Since Memorial Day, the wholesale shift has made it so the Valeros ( VLO - Get Report) and the Tesoros ( TSO) have nowhere to put gasoline and little demand.

In other words, all the canards of terrorism and disruption were no more than canards. The demand destruction, to use the cliché that has taken over the airwaves, was monumental and stopped the oil rally in its tracks.

Sure, there were changes in the margin rules, and the dollar rallied, but the dollar stopped going down a while ago -- during the oil spike, actually -- so that didn't seem to matter much either. It was supply and demand.

That meant those who had made a bet on higher oil prices now had to exit the trade to avoid being wiped out. In other words, profit-taking. Don't believe it? Look at how many people had to exit the stocks. The commodity was even more chockablock with investors who weren't indexing but just getting it right. They are still liquidating and just praying for a couple up days so they can unload.

I don't think they will get more than a smattering.

It's funny, we don't hear "linkage" now, do we? We don't, because there really never was any. We just finally got enough oil in the pipe and finally got to where the buyers went on strike.

That's what happened. Nothing more. They are still on strike. That means they still go lower.

Random musings: Speaking of too much supply, how about the PetroHawk secondary. Just what the market needed! Ugh. Too bad, because if you go read the Devon ( DVN - Get Report) conference call, it is spewing cash almost as fast as it is spewing oil. It is selling for $16 a share of proven reserves.

At the time of publication, Cramer was long Devon.


Bifurcated Banks

Originally published on Tuesday, Aug. 12, at 9:31 a.m. EDT

Maybe it is time to differentiate the banks. That's what I saw Mike Price do in a fascinating interview on Bloomberg, where he says he doesn't like Wachovia ( WB - Get Report) or Citigroup ( C - Get Report).

At this point we know of two kinds of banks -- the ones that have refinanced or don't need refinancing and those that need capital badly. I think it is obvious that Citigroup, Wachovia and Washington Mutual ( WM - Get Report) need capital, the last being truly a joke because Kerry Killinger -- still the CEO! -- came out last week at an analyst meeting and said the company didn't. John Thain lives!

A portfolio that shorts Citigroup and Wachovia and goes long Goldman ( GS - Get Report) and U.S. Bank ( USB - Get Report) -- no capital needed -- may be not bad here if you can get the ratio right. Everyone's cutting Goldman numbers, which is logical now, except at a certain point, the shrinking of this industry is going to make them a huge share-taker, and they will actually be able to raise price one day. But the real problem numbers are with Citigroup and Wachovia. The latter has a plan, which I believe will be to split the bank in two: a good bank and bad bank -- a la Mellon in the 1980s, a very successful split -- but people have to remember that the split was initially a voracious user of capital.

That initial drawdown hasn't happened, although the rally in the stock makes it right. The writedown sets the company up for the capital raise I believe is coming.

Citigroup is different entirely. It is just a giant deposit base with everything else offsetting that deposit base. I still can't see how they can make it without raising a huge amount of capital. They will, and the bank will stay in business because of that capital base, but the idea that they don't need more capital when we didn't even know the size of the hit in auction-rate preferreds is a little ridiculous. I am sure they have no idea how much capital they need, and they have no idea how bad their portfolio is.

Which reminds me of AIG ( AIG - Get Report). I am deeply focused on their inability to value what they were on the hook for at their Dec. 6 meeting, the one where they basically said if everything goes bad in the 2006-2007 vintages they would lose no more than $500 million. Yes, that's an "M," not a "B." That's because they didn't know what their real exposure was because it was all based on models and then blessed by a Wharton professor. The stuff's pretty embarrassing. Of course, no one gets shamed for it because we are on Wall Street, where anything goes and Fortress ( MER) pays some guy $300 million to generate what? Losses?

Sorry. I am outraged.

Citigroup is like AIG writ large. AIG made this really big deal about how they pulled out of all of these mortgage markets in 2005 because they "saw it coming." Of course, despite the pullout, they had tons of exposure to it and their exposure to Europe is now really atrocious -- they seemed to have no standards there are all, despite their admonitions about how careful they were -- and I am confident will make it, so AIG has to do a capital raise.

The real crime of this bank run -- AGAIN -- is that other than Merrill ( MER), nobody raised funds. No one. Now we have to endure another downturn, where I believe WB and C will have to force one on the market. They are the shorts. The well-capitalized ones are the longs. Just as they should be.

Random musings: Again, I am directing you to the quant piece by Doug Kass, which everyone is buzzing about. Really great.

At the time of publication, Cramer was long Goldman Sachs.


SEC Paints a Target on Downey and Its Ilk

Originally published on Wednesday, Aug. 13, at 7:341 a.m. EDTMemo to the FDIC: Watch your back. The SEC just flipped its allegiance to the bad guys, the guys who want to break not just certain banks, but your bank! That's right, with the scrapping of the emergency rule that eliminated naked shorting, where you don't have to find the stock, and with the end of the vigilance against bear raiding, the SEC may have just caused a run at the FDIC.

I had hoped that the SEC would see that these financials have been manipulated to unreasonable levels, making the confidence in all institutions so low that nobody wanted to give them money. The rule change -- which when you think of it, wasn't much of a rule change as much as an enforcement of the way things are supposed to be, where you actually have to find the stock you sold short first so you don't fail to deliver -- worked!

It gave the system some breathing room. I think the rule change might have saved Merrill Lynch ( MER) from being shorted into oblivion so it couldn't have done its deal. Lehman ( LEH) didn't do a deal, those bad boys be back on the griddle now for unknown European exposure. AIG ( AIG - Get Report) wasn't protected in the first place and I believe will need to raise $10 billion to $15 billion in the teens to cover its European exposure. Now there's little hope at all for Fannie ( FNM) or Freddie ( FRE), as their stocks will be blitzed into oblivion and Hank Paulson will have to start the planning of cash infusions as opposed to what he said last Sunday -- why did he say that, for heaven's sake? Maybe he's too close to John "We don't need capital" Thain from their Goldman ( GS - Get Report) days.

But forget all that, let's talk about reality, let's talk about what could happen now, now that it is clear that not only is the SEC not extending these rules to other financials, as I had hoped, but is letting them expire.

Let's talk Downey Financial ( DSL - Get Report). Everyone knows this savings and loan is on life support. The headlines are just awful, the losses staggering, the deposits are running the wrong way, and it looks like another IndyMac is in the works.

Now, consider that more than 60% of the float of this bank is short, so it is virtually inconceivable you can get a borrow, so you shouldn't be able to short it, but naked shorting's allowed now, so you don't have to worry about a buy-in. Second, no upticks, so what's the point of waiting here?

You can only guess what the hedge funds will do now, right? The stock was down 25% yesterday. Why not just mash the stock to zero, the way IndyMac's was? I think that will happen today and tomorrow and Friday. By that point, the depositors will freak out -- I don't think they hedge funds will hire actors to stand in line, but there sure are enough of them unemployed in L.A. that it wouldn't be too hard to get 'em to hang out at 5 a.m. Just provide them coffee. (I wonder if the union would get angry?)

Anyway, with naked shorting and no upticking, the prospect of pinning Downey at 20 cents or 30 cents seems pretty likely to me.

Then the bank has to be seized. When it does, the FDIC's pressure hoard of insurance capital disappears quickly: Remember, it doesn't have any IndyMac takers yet because there is no mortgage resolution trust to dump bad loans to.

And voila, three days after the rules go away we have a bank panic all over again.

That's what I think will happen now. It just seems so obvious to me -- how can it not seem obvious to the SEC or the FDIC? Is it because, like the Ben Bernanke Fed, there are only academics and laissez-faire theoreticians running the joint with a handful of pols mixed in? Do you think they even know how the operation against Downey is going to work? Do they even know about this stuff?

I don't even think so or they would have extended the rule and broadened it.

I have seen the power of the rules in their ability to save even the worst of institutions that could be saved.

When the rubber hit the road in 1990 and I was shorting all of those failing bank stocks, the one thing that kept nagging at me was whether I could get a "borrow" on some of the worst ones, because everyone else was shorting them, too. In Confessions of a Street Addict, I documented how I got crushed on a Rutherford Savings Bank short I had when my broker could not find any more stock to lend me so I could stay short. I got bought in at a ludicrous price -- the broker just came in and bought the stock back well above the market -- and my quarter was almost lost.

That would never happen now, ever. Because the SEC doesn't care. Why? I don't know. My friend Mario Gabelli told me yesterday that he thought it was just because the academics sold them a book of goods that this stuff didn't matter. He could be very right. I think they are just over their heads.

I thought they may have figured all of this out after the July 15 bottom, but it turns out they really didn't understand that a return to the rules the way they were for 70 years was a good idea, as opposed to the laissez-faire garbage they believe in now.

Downey could have been Rutherford. It could have had a chance.

But not with this market. Not with this SEC.

Look out for this. It's Saturday's headline.

Be ready for it.

Oh, and I forgot something else: There are four or five Downeys out there right now that we all know about.

They will probably all meet the same fate in the same time frame now that the geniuses at the SEC have said all is well and good and the problems have gone away.

At the time of publication, Cramer was long Goldman Sachs.

RealMoney Barometer Poll
1 What would best describe your stance heading into the coming week of trading?
Bullish
Bearish
Neutral
2 Which of these sectors do you think is set to move up in the coming week?
3 Which of these sectors do you think is set to move down in the coming week?

View the results without voting

Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS. Watch Cramer on "Mad Money" weeknights on CNBC. To order Cramer's newest book -- "Jim Cramer's Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer)," click here. Click here to order "Mad Money: Watch TV, Get Rich," click here to order "Real Money: Sane Investing in an Insane World," click here to get "You Got Screwed!" and click here for Cramer's autobiography, "Confessions of a Street Addict." While he cannot provide personalized investment advice or recommendations, he appreciates your feedback and invites you to send comments by clicking here.

TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon.com purchases by customers directed there from TheStreet.com.