By Kunal Jaggi
If you haven't already seen it, here's a video of Jim Cramer "The media's most electrifying market pundit" (according to USA Today) rant about the fed not cutting interest rates sometime after the Bear Stern funds fell apart.
http://www.youtube.com/watch?v=rOVXh4xM-Ww
I think Cramer can be amusing at times. However, I've read two of his books and some of his theories do make sense. Why did he flip out like he did ? Well, mostly people seem to be going with the most obvious explanations - that he was long in the market at that point of time and betting on the Fed to cut rates. Or that his friends at big hedge funds were losing too much money which troubled him. Valid as these theories sound, here's another perspective. Cramer in his book "Real Money: Sane Investing in an Insane World" is a proponent of riding and benefiting from both sides of interest rate changes. Oversimplifying, he basically says that cyclical (typically high growth tech, pharma etc) stocks that are more susceptible to economic cycles must be purchased at precisely the moment when they are trading at their highest multiple. Conversely, non cyclical stocks (steady behemoths like P&G) should be sold when their multiple is at its highest.
The rationale to do this is that as economy slows down, investors typically seek the safety of P&G kind of companies and are willing to pay a higher P/E ratio for their stable earnings. They will sell a stock like RIMM (totally fictitious example) because they figure that it's trading at too high a ratio and the slowing economy will drag down its earnings. But once the economy shows significant depression, the Fed usually moves in to lower interest rates to re-boost the economy. The process then works in reverse - and as the economy improves, analysts who downgraded RIMM will now start anticipating increased earnings and there is a demand again for it - at which point you sell. Then you re-position yourself into P&G, which everyone is discarding because they want to be a part of the growth story. Now, after time, the economy will start overheating and the Fed, in their noble mechanism of controlling inflation, will hike up rates causing a slowdown yet again. Voila, there is a demand again for the P&G that you bought when everyone was selling to get into growth. Of course, you can't time these cycles exactly, but according to Mr. Cramer, you can keep playing this counter-intuitive game.
Now maybe that theory has something to do with his outburst. I don't think he has personal big positions in the market. He keeps a $3 Million portfolio, the proceeds of which are donated to charity. Even with that, he has a 30 day restriction of not being able to touch the stocks since he emails out his weekly positions in this newsletter that you can subscribe to at TheStreet.com
Like I said, I don't think its about money. He's been in the market for 25+ years, made enough and now makes more through his media acts. I think its more ego - maybe he bet real hard on which way the Fed was going to roll and it just aggravated him that he couldn't predict it perfectly like he did for the last 25 years.
Here's his response to the CNBC video by the way -
http://videoplayer.thestreet.com/?clipId=1373_10372626&channel=Cramer+On+Demand&cm_ven=&cm_cat=&cm_ite=&puc=&ts=1186504576694
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