Cramer: Don't be a skeptic on rate cuts:
Don't Be a Skeptic About This Rate Cut
thestreet.com;
By James J. Cramer
1/3/01 2:38 PM ET
It's October of 1998. You know the truth about the Long Term
Capital crunch. You know they are going under. You know how
levered the financial system is. You know that it is too late. The Fed
has waited too long. It is all bad now. The crisis is too deep. So you
sell.
You are a moron.
That's what I did in October of 1998. I knew too much. I knew that
Chase (CMB:NYSE) and Goldman (GS:NYSE) and Citi (C:NYSE)
had bad exposure. I knew that Bankers Trust and UBS (UBS:NYSE)
would be hurt hard. I was deeply worried about Japan. I kept
thinking the whole shooting match was coming unglued. One Fed cut
can mean nothing.
Sure enough, after the cut, we heard the skeptics. I felt great about the
skeptics. They confirmed my belief that things were too bad to fix.
The Fed had dropped the ball! Silly guys! It was the worst mistake
that I have ever made in my investing career. The worst ever. The
Fed injected so much liquidity in the system that the new bull was
reborn and stocks that shouldn't even have been stocks started going
nuts to the upside (e.g. TheGlobe.com).
Why does it matter so much? Because it changes the psychology. It
makes it so you want to buy and own things. The economy just acts
better when rates are going lower, because rate cuts act as grease for
stuck wheels. That makes the companies do better. And what makes
the stocks do better? Every hedge fund manager in the country who is
short is now scared. The Fed is no longer on the side of the shorts.
The Fed is on the side of the longs!
What does it mean for you? Let's take three stocks: Goldman Sachs,
which is up 11 points as I write, General Electric (GE:NYSE) which
is up 3, and Broadcom (BRCM:Nasdaq) which is up 14. I would buy
more General Electric right here, right now. It is a principal
beneficiary of lower rates, as GE is like a giant economy. It is a
greased wheel that just got slicker, and it is a must to own. Goldman
is trickier; I don't like to buy anything up 11, but I would buy more if
it came back at all. This is a fantastic stock to have at the beginning
of the Fed ease. And Broadcom? I would trim it back. I am sure that
Broadcom, the company, is doing OK, but I think that Broadcom, the
stock, will not go up as much as the rest of the market.
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