Thursday, October 9, 2008

The Mind of Cramer

You know James Cramer, the hedge fund operator who hyperventilated his way to television stardom, and who eventually became a contrary indicator.

In one of his more compelling rants, Cramer declared in April, 2007 that the heads of New York investment banks, Lloyd Blankfein, Stanley O'Neal, Richard Fuld, and Jimmy Cayne were worth every last million of their compensation packages.

Better yet, Cramer advised his minions to go out and get rich by buying shares in these great companies. He favored Goldman Sachs because that was where he had started his career. Of the CEOs he touted in 2007 Blankfein seems to be the one who really did earn his compensation.

The trouble is: if you had followed Cramer's advice, you would have bought GS at $230 a share. As of yesterday, you would have lost more than half your investment.

Perhaps that is why Cramer gave up running a hedge fund.

Now, New York Magazine has given Cramer a platform from which he can regale us with his prescience. This week he penned an essay predicting where the markets will be a year from now, in Fall, 2009. Link here.

His bold prediction: if McCain is president we will have a depression; if Obama is elected we will have a recession.

His thinking goes like this. We need to restore trust in the financial system. Without trust banks refuse to loan money, markets seize up, no one can get credit, and business activity comes to a halt.

Cramer understands that trust is very difficult to manufacture, more so when it has been trashed. His proposal: we should elect a president we can trust to manage the crisis. If everyone trusts the man at the top, then trust will be restored throughout the financial system.

In his words: "One of the central causes of the financial crisis is the now epidemic lack of trust in the financial system.... Having a president who can restore faith in the system as soon as possible is critical to restoring the credit freeze."

Cramer ignores the fact that the two people who are manging the crisis are Henry Paulson and Ben Bernanke. Is there something about these two that does not inspire trust?

Anyway, Cramer offers that the Street largely prefers Obama to McCain, because he has a more subtle grasp of economic realities while McCain has been clumsy in his efforts to deal with the crisis.

While McCain stepped into the maelstrom, Obama's more subtle mind said: Call me if you need me.

Also, Cramer largely prefers Obama advisor Lawrence Summers to McCain adviser Carly Fiorina. While no sensible person would want to hand Treasury over to Carly Fiorina, Cramer seems to have forgotten that the banking deregulation bill that Democrats are blaming for the problem was crafted by Lawrence Summers and signed by Bill Clinton.

But, do we really have to wait a year to discover whether Cramer was right? Not at all. We cannot predict the future with certainty, but the market itself has provided us with a few signs, or, if you prefer, omens.

Isn't the market a discounting mechanism that projects the future. Who would you rather trust, the collective wisdom of Cramer's friends or the collective wisdom of the market?

Assume that the market cares about who becomes president. Cramer makes that presupposition, so I will accept it and test it.

We can test it by looking at market action in conjunction with presidential polls.

The Real Clear Politics average showed John McCain with a slim lead for the week of September 15. Over the weekend of September 20 and 21 the polls shifted and Obama took the lead. He has maintained it ever since.

So Monday September 22 would be the first day that the market could have offered an opinion about a future Obama presidency.

The last day that McCain led in the polls, September 19, the Dow closed at 11,388. On September 22 the market closed at 10,854. Not what I would call a rousing vote of confidence.

Yesterday, in the wake of a McCain debate performance that seemed to seal the deal for Obama, at a moment when Intrade was giving him a 75% chance of winning, the Dow closed at 9258.

Of course, there are many other factors that can impact markets. I would not bet the family fortune on this correlation.

I am merely following the logic of Cramer's argument. To take it a step further, we can conclude that Cramer should begin preparing himself for a new career as a political party hack.

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