The success of the Fed is mind-boggling on these scores, particularly given that you heard over and over again that the various bond-buying programs weren't working. I wonder how many shorts got caught believing the ideologues who complained endlessly about the central bank's lack of efficacy. These shorts ran into a Ben Bernanke buzz saw, because one of the Fed chief's unstated goals was to save the likes of Principal and Lincoln and Genworth and Radian from going under. The shorts targeted the exact same thing that Bernanke targeted, and Bernanke won.
Then there were the short-sellers I regard as having been too skeptical. All of the defense-stock short positions came under this category. These were simply intellectual shorts gone wrong. It was such an easy way to lose money, in retrospect. Even if we didn't see it coming, all of these companies had a real bead on the sequester, and they took action well ahead the ax man. Not only that, but these stocks had never been expensive to begin with, and the companies have always been huge cash generators. Shares simply failed to come down. In many ways, that was enough.
We saw many situations like these in which the skepticism got out of control. The airlines, for example, had always been reliable short positions. Whenever their heads lifted, it was important to lay down as much short firepower as possible. But when these failed to disappoint, and when the Justice Department then gave the OK to the U.S. Airways-American Airlines (AAL) merger, there wasn't a short leg to stand on.
There are so many examples of this kind of behavior. The newspaper stocks had been reliable shorts until this year, when consolidations and vanity buyers stepped in and the remaining players simply turned up and stayed up. I remember recommending New York Times (NYT) and being laughed at by shorts who thought I had lost my mind. Nope, they lost their shirts. The refiners were supposed to be hammered because of a narrowing of the spread between West Texas Intermediate and Brent. Didn't happen. The disk-drive stocks were supposed to be bashed by giant new foundries pumping out drives. Nope. They weren't built. Hewlett-Packard (HPQ) was supposed to be destroyed by the anti-personal-computer tidal wave. Amazon (AMZN) was supposed to crunch Best Buy (BBY). Neither happened, and the stocks just couldn't stop rallying.
When we look back at 2013, we can say that it was the beginning of the economic expansion that was behind so much of the rally -- or that it was the Federal Reserve's low rates. But perhaps all that really happened was that the hedge funds that shorted for a living, and which had done so well even with the rallies off the bottom, capitulated. The result was a rally of insane proportions for many sectors, based on nothing more than a lack of degradation or minor reversals of fortune.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.
Editor's Note: This article was originally published at 6:48 a.m. EST on Real Money on Jan. 7.