TheStreet.com's Jim Cramer says balance sheets are strong, so spillover isn't an issue. I get emails and postings almost every day from fixed-income specialists, saying that the credit markets' myriad problems simply aren't being reflected in the equity markets, and that's just plain wrong. They warn us equity players that we are dreamers and that it is just a matter of time before the terrible problems in collateralized debt, huge leverage, and now auction rate preferred notes spill over into equities and that any rally in stocks is just a fool's paradise.
There's a problem with this inevitability story though, one that eludes these critics and might continue to elude them -- it hasn't happened yet, despite a year's worth of turmoil. That's a long time for a big problem like this to be cordoned, so it is worth looking at whether the naysayers are wrong and something else is at work.
When I look around at the vast choices of assets out there for the thousands of fund managers and institutions that have to put their money somewhere -- provided it is not dedicated to a particular asset from the get-go -- I see one world in chaos and another world in order. The bond market, the credit market, is in total disarray, with every aspect of its existence save Treasuries under fire. We know now that a simple reset market for municipals is failing because, of course, the charade of the bond insurers and their chimerical protection. The CDO market stinks. This is a multibillion dollar market where no one can figure out the prices of anything and the spreads between the bid and the ask are so wide that no one can afford to own or trade them. You don't know where they are marked. You don't know what's in them. You don't know what they are really rated. They are basically worth nothing right now to anyone. Commercial paper? Hardly worth the pick-up in interest. "Cash reserves"? We have seen the "buck" supported over and over again. There has to be a moment where the buck is broken.
I've even heard lots of reservations about agency paper issued by the government-sponsored agencies, although these I question because if they don't work, then it is the end of the credit world.
And then there's stocks. With the exception of companies in finance and autos, the balance sheets of corporate America are unbelievably strong. They are banks, where the banks are trying to figure out the best the best way to return capital: buybacks, accelerated buybacks or dividends. I have seen pieces of research during this period where the issue is "too much cash," like the piece this week from Goldman Sachs about CF Industries (NYSE: CF) (Cramer's Take), the ag play. When you look at an Altria (NYSE: MO) (Cramer's Take) or a 3M (NYSE: MMM) (Cramer's Take) or a General Electric (NYSE: GE) (Cramer's Take), you see so much cash you have to figure that their dividends are much safer than so much of what is offered in the credit markets, and after taxes, they simply can't be beat.
When you go through the major tech companies -- which at one time would have needed cash -- you find coffers brimming. Just think of the dividend that Cisco (NASDAQ: CSCO) (Cramer's Take) could have, or how much Intel (NASDAQ: INTC) (Cramer's Take) could raise its dividend. Look at the drug companies with their outsized dividends they have no problems paying. The balance sheet of Johnson & Johnson (NYSE: JNJ) (Cramer's Take) is better than even the best bank. The cyclicals have incredible balance sheets: United Technologies (NYSE: UTX) (Cramer's Take), Honeywell (NYSE: HON) (Cramer's Take), Caterpillar (NYSE: CAT) (Cramer's Take) -- they have tons of cash.
AT&T (NYSE: T) (Cramer's Take) and Verizon (NYSE: VZ) (Cramer's Take), even after all the deployment they do, have huge excesses of cash. It's over and over, every industry: Wal-Mart (NYSE: WMT) (Cramer's Take) in retail, VF (NYSE: VFC) (Cramer's Take) in apparel, General Mills (NYSE: GIS) (Cramer's Take) and Kellogg (NYSE: K) (Cramer's Take) in food, McDonald's (NYSE: MCD) (Cramer's Take) in restaurants, Nucor (NYSE: NUE) (Cramer's Take) in steel, Freeport (NYSE: FCX) (Cramer's Take) in copper, Exxon (NYSE: XOM) (Cramer's Take), Schlumberger (NYSE: SLB) (Cramer's Take), Conoco (NYSE: COP) (Cramer's Take), Halliburton (NYSE: HAL) (Cramer's Take) in oil and gas. These are the safest in the game.
The bond market can't hold a candle to the liquidity in the stock market and the non-levered balance sheets of the players. Companies like Citigroup (NYSE: C) (Cramer's Take) and Merrill (NYSE: MER) (Cramer's Take) are frantically trying to "shrink" their balance sheets, take in less debt and borrow less money. They can't. They need every penny. So do Bank of America (NYSE: BAC) (Cramer's Take) and Wachovia (NYSE: WB) (Cramer's Take). Only Wells Fargo (NYSE: WFC) (Cramer's Take) of the major banks seems in decent shape.
So, the dichotomy is rooted in fact. The issue is empirical not emotional. Stocks aren't reflecting bonds because they shouldn't reflect them.
That's the real issue. I will be driving this home multiple times on air because I keep hearing these concerns on air. The crisis and chaos of fixed income isn't spilling over because it shouldn't. The crisis is about disorderly markets with hard-to-value securities, no insurance backstop, and no natural buyers.
The opposite is true in stocks.
So the two shall NOT meet. It's just plain logical. Random musings: Best line I have heard in a while -- "If you want AAA, buy batteries."
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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. At the time of publication, Cramer was long Citigroup, ConocoPhillips, Freeport, Goldman Sachs, McDonald's, Altria and Schering-Plough. At the time of publication, Cramer had no positions in the stocks mentioned.
Closing Bell: Another day, another dollar loss for the Dow
Stupid question: Can the U.S. handle more housing stress?
Serious Money: How safe were BRK, BUD, PG, SO, & UPS?
Reader Comments (Page 1 of 1)
2-15-2008 @ 10:21AM
John T said...
guess you've never been in a burning house. Even though you might be fine and comfty upstairs it's just a matter of time before you realize the danger and leave. Although some will stay with the expected results - you decide
2-15-2008 @ 12:31PM
Steve in Denver said...
I don't know what a burning house has to do with this topic, but I do know that companies have more cash than at any other time in history, and are making stratigic moves to strengthen their positions in their industries. I also know that the often hysterical tones that "experts" seem to feel they have to use is just that, and the consumers eventually tire of Chicken Little and realize things always work out and get back to satisfying their life's needs. I think times like these are called Minsky Moments (see Hyman Minsky)
2-15-2008 @ 1:15PM
Ynot said...
Companies may have money but the consumers do not. WHAT ARE THE COMPANIES GOING TO SELL WHEN NOBODY IS BUYING? All the signs are there that this economy is in big trouble without reading what any of the so called experts say. Just look around once you exit Cramers dream world and walk back into the real world. Wake up people. Look at the for sale signs, food prices, gas prices, layoffs, government bail outs, credit defaults and everything else. The middle and poor class are tapped out. Then on top of that it sounds like other countries are starting to have problems of their own. Good luck getting out of this mess.
2-15-2008 @ 1:24PM
Ynot said...
Market is down again. Time for Cramer to start crying for more rate cuts. Maybe if Hillary cries with him they will drop another 3/4 points. Don't worry about inflation because the government will send us more money we didn't have to work for. Gotta go. Their here to reposses my computer.
2-15-2008 @ 2:20PM
John T said...
Steve in denver-
Remember Bristol Myers- they have cash but unfortunately in was in wall street garbage, I forget how much they wrote off. They also said the writeoff may increase. When the smoke clears that's when you can make realistic judgements about business's cash!
2-15-2008 @ 3:33PM
carpenter said...
cramer is now a sell out for corporate america. to bad jim, you started out with good intentions. if you werent a sell out you would not be telling people to do what you are. you lost touch with reallity. flush out these corporate asswipes you have been pandering to. this reminds me of reaganomics! give tax breaks to the rich and they will spend the money and it will trickle down through the economy. what a bunch of bull %$#@^. it makes me sick to even hear anyone say reagan was a good president. maybe for corporate america he was. yea, he also started corporate welfare. CORPORATE WELFARE, WHAT A JOKE. in the words of our former president" we need a revollution to revive this country" millon dollar ceo's need to come to an end. they have sucked this country dry. we have come to the day were the working man is nothing but a slave to a paycheck. "WORKING MAN" NOT A STUFFED SUIT. were is our government regulation. gas is out of control. milk is almost four dollars a gallon. farmers are paid for not growing food. minimum wage is a joke anywhere. corporate profits are at an all time high. our government has lost grip with reality. all a man has is hope. take hope away from a man, and make him desperate, and things will become intolerable. this is were we are headed and i feel SAD for our country. our poor country has been raped by corporate america and they are paying off government polititions to get away with it. corporate americas thinking is" if he can cheat 1 million people out of 100 dollar, he will have 100 million dollars, "GREAT" and it willl only cost HIM 1 million dollars for that political whore. "WHAT A BARGAIN" WAKE UP PEOPLE , REVOLLUTIONIZE AMERICA.
2-16-2008 @ 12:40AM
rich burden said...
hey jim..great call on hcbk and pbct..remember hudson is the strong one, better than pbct. well one was up 36 cents and the other was down 57 cents
2-16-2008 @ 12:44PM
Colorado person said...
carpenter said... Carpenter you are correct. Corporations own Politicians they are bought and paid for by Politicians. It's politic's. When Carter the peanut farmer was president there was a peanut butter shortage and the price of peanut butter went to 4 dollars a jar. When clinton was president the cost of healthcare and litigation went through the roof. when bush senior was president the price of beef and gas skyrocketed. with bush junior the price of oil and beef skyrocketed. ALL polititions are owned by large corporations to do their bidding. It's oil company's and Haliburton who own the current president. None of them gives a crap about America. Just Money
2-17-2008 @ 6:18PM
james said...
You two socialist workers party members knocking Reagan are silly! Reagan didn't invent corporate welfare. There is NO SUCH THING, you petty little twirps. Welfare is a state issue and corporate taxes are about as high as any in the modern civilized world in the US! You're nothing but losers using this board to champion the Socialist Workers Party! The trickle down theory has always been a fact in capitalism. Government is NOT a solutionto wealth for individuals.It is NOT our master, as YOU would want it to be. Reagan DROPPED TAXES! It was the leftist Democrats that created the 2 for 1 buck scandal that Reagan fell for. In other words, they lied and Reagan was blamed. Reagan was the finest President this country has had since Washington. No one, not one has had more inspiration accredited to them as Mr. Ronald Reagan. Corporate welfare does not exist, you got it? If not.........study economics when you can go to the library without your mommies!