Cramer Vs. Cramer

“Exit, pursued by a bear.”

William Shakespeare, (1564 – 1616)

Stage direction in “The Winter’s Tale”

“Dear TSC community,” begins a cheerful letter from James Cramer of TheStreet.com. “I know what you’re wondering; ‘When is everything going to turn around?’

“Everywhere I am, whether on CNBC, at my desk, or on Wall Street, I’m asked the same thing, ‘Cramer, when will the market turn around?'”

How can Cramer be ‘everywhere,” a grammarian or philosopher might wonder. But our beat is investments. So what we wonder is this:

Why would anyone care what James Cramer thinks?

I also have an answer: because knowing what Cramer thinks can be very rewarding…but only if you remember to do the opposite.

“Cramer,” reports Christopher Byron in an MSNBC article, “…declared on the day after the Fed cut interest rates for the first time on Jan. 3rd, ‘I am now confident that the bull is back. We have arrived. We have made it. Now we can prosper. Nasdaq 1500 just ain’t in the cards.”

In order for the Nasdaq to sink further, said Cramer, it would mean that his ‘must own’ companies of the Information Age – such as Cisco and JDS Uniphase — would have to “blow up.”

“On the day he wrote that,” Byron reports, “JDSU Uniphase stood at just under $48 and Cisco stood at $41. Today JDSU sells for $12.50 and CSCO sells for $18 – a loss of 74% for JDS Uniphase and 44% for Cisco Systems. In other words, they did exactly what he said couldn’t happen: they blew up.”

[I understand Byron’s point, but not his arithmetic – the loss for Cisco should be more than 50%.]

“That same day,” Byron continues mercilessly, “Cramer said, after claiming to have ‘touched base with a number of my sources,’ that he had identified three stocks that ‘will still be standing’ and won’t be ‘guiding down’ in their next quarter.”

One of the three was the telephone giant Nokia, then trading at $44 a share. But within 10 weeks, Nokia began ‘guiding down’ so often it might have been mistaken for an air traffic controller. It said first quarter revenues would not be what was expected. Then, it said second quarter revenues would also be disappointing. And then, last week, it announced layoffs of 1,000 people. Nokia has been whacked to its knees – losing more than half its value since Cramer assured us it would “still be standing.”

What of the other two? Brocade fell 80% and Veritas collapsed 57% “almost immediately after [Cramer] made his predictions,” Byron notices.

The Nasdaq, too, defied Cramer’s forecast. It didn’t sink to 1500, but almost – falling 36% in the 3 months following, to 1638.

There was a time, believe it or not, when people treated Cramer, Abby Joseph Cohen, Henry Blodget, and Mary Meeker as if they had not lost their marbles or their scruples. Those were the days when you could pay as much as $71.25 for a share of Cramer’s TheStreet.com and not think someone had misplaced a decimal. (Today, shares can be purchased for only $1.42).

Cramer boasted that TheStreet.com would soon beat out the Wall Street Journal as the leading source of financial information and opinion. And many people believed him!

And they still believed him on February 29, 2000 when he gave investors his list of “top 10 stocks for who is going to make it in the New World.”

The grammar got away from him, but not the pitch.

“You know what,” he said, sounding like the manager of a professional wrestling act, “I am going to give them to you. Right here. Right now.” He then named a list of companies which sounded exciting then…but now reads like a roster of the living dead: Ariba, Digital Island, Exodus Commuications, Infospace, Inktomi, Mercury Interactive, Verisign, and Veritas.

“Exactly two weeks later,” Byron resumes, “the tech- bubble popped. Since then, Ariba and Infospace have fallen 96%, Digital Island and Exodus have plunged 97%, Inktomi is down 93%, Verisign is down 76%, Veritas has dropped 50%, and the best performing stock on his list – Mercury Interactive – has fallen ‘only’ 38%.”

Cramer’s own dot.com has done no better. TheStreet is down 98% from its high, and has never made a dime of profit. Its latest-reported quarter showed losses of $7.2 million on revenues of $4.4 million. Hard to believe that investors once valued the company at more than $1 billion.

But then, investors seem willing to believe anything… and anybody who tells them what they want to hear.

And thank God for them…the Cramers, Blodgets and Meekers! They’ve provided us with so many guffaws and giggles…

…and profits, too, for those who were able to ignore them.

Your financial pen-pal,

Bill Bonner
Baltimore, Maryland
July 5, 2001

Have Americans become too complacent, too self- satisfied, too confident of the future?

Why else would consumers continue to ‘hang in there’ while they lose jobs…incomes barely keep up with inflation…and debt payments, mortgage delinquencies, and bankruptcies soar? Even PSINet’s blue neon sign still graces the new Ravens stadium in Baltimore. (PSINet went belly-up last month – one of 53 dot.coms that went out of business in June, bringing the total of defunct dot.coms to 330 for the year.)

In 1995, Americans paid $100 billion on the principle of their debts. This year, it is 4 times that amount.

Yet, they continue to spend…as if absolutely sure that the ‘second half recovery’ will be here any day. Maybe it won’t.

“If there’s a surprise waiting for us in the second half of this year,” writes Mort Zuckerman in US News & World Report, “chances are it won’t be a recovery of growth but, rather, a disappointment that the combination of Fed easing and Tax cuts has failed to jump-start the economy. Why? Because of the triple whammy of weak consumer spending, declining capital spending, and tumbling exports.”

“America is hurting,” he observes. “After the booms in consumer spending, capital spending and exports, the time for adjustment has now come.”

Yes, that’s the way it appears to us, here at the Daily Reckoning. But let’s see what Eric has to say…

******

Eric Fry reports from Wall Street:

– If Mr. Second-half-recovery has arrived, he is being a bit reclusive. A few folks report sighting this economic Sasquatch, but most of us have never laid eyes on him. In fact, many of us do not believe he exists. And for good reason.

– Scarcely a day goes by that several large American companies – 3M and DuPont being among the recent examples – do not report both disappointing earnings and a worrisome earnings projection.

– Five days into the second half, our recovery consists of strong car sales and decent home sales…on average. Of course, home sales are very sluggish in certain parts of the country. Apart from these two bright spots, most other indicators cast nothing but shadow.

– The US manufacturing capacity utilization rate, at 76%, has now dropped below the lowest level of the 1990- 91 recession (76.6%).

– Worldwide sales of semiconductors in May sank more than 20% below year-ago levels, according to the Semiconductor Industry Association.

– “Hotels are having their worst time in ten years,” reports the New York Times. “Domestic airlines, with their worst slump in 25 years because of the decline in business travel that started in January and accelerated in the spring, are so desperate to scratch up some revenue that the five biggest ones this week are all promoting special summer travel sales.”

– If the recovery had arrived, would every major domestic airline and hotel chain be complaining in unison that business travel has evaporated? Delta Air Lines even announced this week that in response to slowing demand it will remove 10 aircraft from scheduled service.

– And don’t expect any help from either the Japanese or the European economies. Japanese business confidence fell sharply in June, according to the Bank of Japan’s three-monthly Tankan report. Likewise, the euro-zone purchasing managers’ index fell to 47.9 in June, its lowest level since December 1998.

– Yesterday, Marconi Plc, the U.K.’s largest phone equipment maker, disclosed a 15 percent drop in sales this fiscal year that will halve its earnings and also announced plans to shed a total of 8,000 jobs. Chief Executive George Simpson explained, “The biggest difference has been a significant falloff in orders in Europe.” Marconi — like Nortel, Alcatel, Corning and all the rest of the myriad companies selling various telecom products — may find itself waiting a very long time for demand to recover.

– Michael E. Lewitt, an astute hedge fund manager I know, observed recently, “By the late 1870s, an abundance of cheap financing led to a doubling of railroad mileage…Two fifths of railroad bonds subsequently defaulted. Sound familiar? Maybe it is an historical accident that thousands upon thousands of miles of dark fiber-optic cable were laid along railroad lines.” Or maybe it is simply poetry.

– As if the world doesn’t already have enough debt sloshing around, worldwide bond issuance totaled a record $924 billion in the first half of 2001, according to Deal logic Capital Data. For perspective, 1999 was the first time that bond issuance topped $1 trillion for an entire year. Corporate and government debt is reproducing like rabbits, and just like these furry, long-eared critters, many of this year’s debt issues will disappear into some black hole somewhere. Credit quality is falling as bond issuance is rising.

– Still, the tidal wave of cash cascading onto US shores from foreign investors is truly breathtaking. “During the fourth quarter of 2000 and the first quarter of 2001 combined, the U.S. attracted more foreign capital inflow than during any other two-consecutive quarterly period ever,” Greg Weldon observes. “The $373 billion in combined net direct and net portfolio inflows amounted to twice the current account deficit for the six-month period.” Perhaps this indicates a telling sign of the recent strength in the dollar.

– But if the days of free-flowing foreign capital (not to mention plenty of dumb money right here at home) are ending, the dollar will suffer along with most other US financial assets. America has yet to “come to grips with its own structural excesses,” says Morgan Stanley economist Stephen S. Roach. The yawning current account deficit is but one of them.

*****

Back to Bill in Baltimore…

*** What really sets America apart from other nations?

*** “Everything seems to be a bit more extreme,” said Benoit, a young Frenchman I know who is doing an improvised work/study program in Baltimore.

*** I saw more of what Benoit must have had in mind yesterday, at the Scottsville, Virginia, Independence Day parade. The very small town on the banks of the James River put on a big show – displaying what Tom Wolfe calls the ‘baroque exuberance’ of our nation. There were cowboys and Indians, macro men in miniature cars, marching bands and county fair queens, and one zany enthusiasm after another…including a group of bikers flying a “Motorcycle Ministries” banner.

*** “We had an even better one out our way last year,” said my brother-in-law from nearby Lovingston. “Every year they set off some fireworks… but last year was special. Somehow, one of the roman candles or something got into John Murray’s barn and set it on fire. Of course, the volunteer fire department was right there – they were in the parade.

*** “The barn blazed up and sent sparks up into the air. It was really impressive…so they just let it burn. And everybody said it was the best fireworks show we ever had.”