Which Year's Bear Is This?; Blame Commodities: Jim Cramer's Best Blogs

 

NEW YORK (Real Money) -- 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:

  • His reasons for believing that this bear market is more like 2011's than 2008's.
  • Why the commodities sector deserves as much blame for the current mess as the Fed.

Click here for information on RealMoney, where you can see all the blogs, including Jim Cramer's -- and reader comments -- in real time.

 


 

This Bear Is More Like 2011 and Will Pass

Posted on Sept. 29 at 3:02 p.m. EDT

OK, I've been a bear. It's been right. The market's been horrendous.

But we have to talk about something tonight because when I am recognized as being a big bear -- as USA Today did today -- and you are beginning to hear everyone talk about a bear market, you need to know what would make me more constructive.

First, this isn't easy. There's so much to dislike. We have the Fed doing all the wrong things. Think about it. One day Fed Chief Janet Yellen says they are not going to tighten. Then in the same press conference she says they are going to tighten. Then she clarifies in a speech that they are going to tighten unless something really bad happens, which means then they won't tighten. They are ready to lift off in 2015 unless they don't lift off. Meanwhile, the same Fed governors and presidents who won't even acknowledge they are sowing confusion are adamant that it's time to tighten, even though things have gotten appreciably weaker.

These people have worn me down and added a tremendous gravitas to the bearish case that I have been stuck with for some time. Their indecision is a huge part of the overhang. Sometimes I wonder, "What do they know, what is the event they are worried about, or events?"

Are they concerned about the possible collapse of the huge mining and trading concern Glencore (GLCNF) and its minimum of $50 billion in debt? The company came out today and said all things are fine, so is the Fed less worried? Are they wary of the $170 billion indebted monster that is Petrobras (PZE) and what it would do to all of the high-yielding funds in the world? Are they focused on the newfound problems at Volkswagen (VLKAY) ? Do they know about a bank or brokerage that is in trouble? Do they sense, like Carl Icahn in his video diatribe against high-yield bonds issued, that many investors are huddled in these to reach for yield, something I can't stand and railed about since the start of the show in 2005?

Do they know of a country that's about to go under? Do they have a secret knowledge of a government shutdown? Jeez, they make me feel something is looming which causes more woe. Plus, I am now in the camp that if you can't beat them join them, but recognize that many bad things could happen when they raise, even as so many tell you they won't. I wish I had their certainty, but I am too old and have lived through too many tightening cycles for that.

I don't like this political backdrop of uncertainty. I do know that the Democrats who are running seem as hell bent against people making money in the market as I can find, and the Republicans, well, who the heck knows? Only Donald Trump seems to be offering a plan and it's pretty pie in the sky, although I like that he wants to get rid of the big tax break for hedge fund managers.

I know good news doesn't matter much. Apple (AAPL) sold so many more new phones than I thought possible, but its stock is being pummeled. We got some tremendous earnings last week from the homebuilders, but they are all down. Nike (NKE) did well, but it's been giving up the gains slowly, but surely. Alcoa (AA) announced a fantastic restructuring that will bring out a lot of value and it barely budgets.

The U.S. dollar, which has actually been weaker against the euro, hasn't mattered because it is staying strong against all other currencies because those currencies react to a tightening.

China continues to struggle. Each morning when I awake I expect to see the critical 3,000 level on the Shanghai market breached. The only reason why it hasn't is because of the government's unsustainable prop-up.

It's nasty.

So why bother to be constructive at all? First, I don't hear a lot of bullish commentary any more from everyone. I feel I have been joined by the majority of those who opine. That's worrisome. The consensus is rarely right when it is all in, no matter what the direction.

Second, despite my bearishness I am so pummeled on Twitter (TWTR) as someone who is bullish that we might be at a short-term bottom. When you get such raw hatred that you have to resort to posting your fantasy football win to show something good, you know you that the community wrath is too great to be a top. More likely, we are due for a bounce because sentiment is that tortured and ugly. Get ready for a lot of pictures of my dogs, because nobody ever argues with a dog.

Plus, empirically something has changed. When I say we are in a bear market that means stocks are going down. But how much down? Here are two interesting stats.

  1. Of the 1500 stocks that are part of S&P baskets, 117 are down 50% from their highs. That's plenty.
  2. More importantly, 600 are down 25% from their highs. That's staggering.

Those who are just beginning to ponder the notion that we are in a bear market should consider those numbers. Of course it's entirely possible that you need a majority of stocks to be down 25%. Maybe some of you think that all stocks have to be down a minimum of 25% and many more should be down 50%.

That said, you are really dealing with some serious damage and I do think more is on the way simply because there are so many broken charts and broken hedge funds and broken concepts, like roll-ups and drug breakthroughs and master limited partnerships that can't stop falling.

Still, let's give this bear its due. You cannot say we are early to the sirens of destruction. As a defender of your capital I am not going to let my guard down. But I am also not going to say that nothing's really gone down and the rollovers have just begun. They've been going on for months, accentuated by endless selling in all sorts of ETFs that make knocking down stocks just plain child's play.

Plus, all the faves like FANG (Facebook (FB) , Apple, Netflix (NFLX) and Google (GOOGL) ), are in the woodshed and their shareholders are being beaten until morale improves. Biotech had been the brightest star in the horizon. T say it has dimmed is too kind. Natural and organic have become unnatural, inorganic and just plain dead. Tech? The cloud? Sold to you. Roll-ups? They have gone from darlings to the most hated stocks in the universe. I may go as a Roll-up for Halloween. It's going to be this year's Jason or Freddie or Walking Dead.

All that said, I have some stocks I am constructive on and would be buying for my charitable trust if we weren't endlessly restricted. I like Eli Lilly (LLY) for its diabetes and Alzheimer's drugs and now let me add a rheumatoid arthritis drug. I like General Mills (GIS) for its consistency and Conagra (CAG) for its restructuring, although it does have too much hedge fund money in it. Let me add McDonald's (MCD) , where today Credit Suisse came out and said that this three-and-a-half yielder could report an upside surprise. I like the menu changes that new CEO Steve Easterbrook's put through.

I know, not a lot. But unlike 2007-2009, I remain convinced that this market is more like 2011, which would put the downside for the Dow at 15,231, a little less than 800 points from here, and the S&P 500 at 1768, about 90 points from these levels. That year had systemic risk galore, but it was from Europe. We did have political nightmares here, though, over the budget. The systemic risk I see is offshore this time too and we have some political toxicity going just like then. That's why the comparison holds up and it's been my totem the whole way down.

The saving grace? We are getting closer by the day, at least most days, and while the torture seems endless, this, too, shall pass.

 


 

The Federal Reserve Is Not the Main Culprit for the Market Rout

Posted on Sept. 30 at 6:48 a.m. EDT

What if commodities crashed and none of the producers blinked?

That's pretty much what happened this quarter, with so many major commodities slumping double digits and oil leading the parade, down 25%, yet we saw almost no supply relief. And that supply/demand imbalance is at the heart of what went wrong in quarter number three, and it should have been what went right!

Right now, many, many people want to focus on the Federal Reserve as the be-all and end-all of any and every price movement. There's no doubt that easy Fed policy has played a major role in boosting asset prices in the years since the Great Depression. There's also no doubt that even talking about the Fed tightening has helped lead to a nearly $11 trillion dollar loss in equities globally in this past quarter.

But while the Fed is certainly playing a role in the destruction of stock values, the real culprit is the commodity market, or more specifically, the spillover of the problems of the commodity producers to the equity markets and the lack of common sense exhibited by almost every major producer.

And for that, we have to go back seven years and the lessons that were learned -- incorrectly, it turns out -- from the Great Recession.

There were two takeaways. The first was that our downturn was much sharper than we thought it would be and has led to a host of ramifications, including lower interest rates that still produced slower growth than expected as well as a much more rigorous, rule-bound financial system. In short, we weren't going to let what happened here with our banks happen again, and the Fed wasn't going to allow us to slip back into recession.

But away from us there was a different takeaway, namely that the United States would be mired in slow growth forever but that China's star would rise and take up the slack. In many ways, we were viewed as a late-stage capitalist nation incapable of regaining footing, while China came out of the financial debacle with wings on, an emerging market that could grow high single-digits no matter what for as far as the eye can see.

So many companies at that moment decided to de-emphasize the U.S. and focus on China. As Caterpillar (CAT) CEO Doug Oberhelman said when he came to Wall Street in August of 2010, "we are stepping up big-time and putting our money where our mouths are. We're going to play offense and we're going to win. We will win China."

In that sense, Cat's a microcosm for the moment because it proceeded to purchase ERA, a maker of Chinese mining roof supports for $677 million and it paid $8.6 billion all in for Bucyrus, a maker of mining equipment principally used in coal production, for $8.6 billion. Both were disastrous, with ERA being written off soon after and Bucyrus' business dropping like a stone. Bucyrus was a lot like Joy Global (JOY) , which is down 67% for the year and is worth $1.4 billion now.

I am not picking on CAT. In fact, it is faring better than most. What matters, though, is that almost every single one of Cat's clients is in the minerals, mining and oil and gas businesses and those are at the epicenter of the weakness in the world. Because China demand for minerals, including, coal, copper and iron ore, was perceived as endless, you had mergers like Alpha Natural (ANR) buying Massey for $7.1 billion back in 2011 to play the China- driven coal super cycle. You had Freeport-McMoRan (FCX) dramatically expanding mining capacity, Rio Tinto (RIO) flooding the world with aluminum and Vale (VALE) , BHP Billiton (BHP) and Rio ramping production in iron, as well as every company, state, private, independent, drilling for more oil.

It was all centered on China, with the last deal, Glencore's (GLCNF) $41 billion purchase of gigantic copper company Xstrata for $41 billion, the worst of them all.

Now China's demand for commodities of all sorts is pretty much falling off a cliff. But none of these companies has really throttled back production. The resource companies, from Petrobras (PBR) and Vale in Brazil, to Chesapeake (CHK) in the U.S., which just laid off 15% of its workforce, to Glencore are all now ridiculously strapped. But no one has really blinked and gluts exist everywhere.

That, not the Fed, is behind much of this last rout, and it hasn't ended because there's been little rationality and a lot of hope that China will come back. It's no coincidence that my two biggest worries at this moment are Petrobras and Glencore. They were the worst offenders.

So, as the quarter winds down, remember, it's not just the Fed, it's China, and decisions made years ago to meet demand that's now going away. That's the real issue, not a Fed tightening, which, of course, will only make things tougher as the year goes on.

 

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long AAPL. TWTR, FB and GOOGL.

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