Lightning Could Strike the Bears
By James J. Cramer
(This was posted on another board...but it could be a catalyst...who knows?)
7/25/01 2:56 PM ET
URL: thestreet.com
Bears, here's where you could be wrong. Here's what would scare you, something that would make you cover all but technology -- and you would wish you covered
that too, even if it was to put the short out again later. The Fed could cut short rates pronto to 2.5%. That's right, a massive one-time ease. Here's what would happen
if that were to occur:
1.The dollar would finally get hit. The people hoarding dollars and shorting other currencies, particularly on margin, would get killed, because they would be paying
rates in other currencies that are much higher than they would get in our cash markets.
2.The shorts would panic and cover, because they would finally be faced with the money that would come from the sidelines. Investors can't build a nest-egg if
their cash is only making 2.5%. You don't keep big money in your checking account, do you? Investors would go to Chevron and Philip Morris and Ford, to
name some higher-yielders, not to mention the REITS.
3.Stocks that have grave multinational exposure, stocks like Pfizer and 3M, would stop getting wrecked by the strong dollar, because no one would be anxious to
repatriate to a currency that pays so little. You would have a real sea-change. (Again, the dollar would reverse fast.)
4.Banks could make a ton of money by borrowing massively overnight and investing in the 10-year or 30-year bonds. These banks would jump gigantically (First
Union and Washington Mutual are good examples). The whole financial sector, the largest sector in the market, would explode to the upside. Brokers can do
this too, but they haven't been too adept at it so far, so I don't want to get my hopes up.
5.Industrial companies immediately would take down a ton of inventory, because the cost of inventory would be much lower.
This move by the Fed would be a shock technique designed to shift capital to risky assets from risk-free assets. I know it would do nothing to help over-levered
companies in the telco business, and it would not cause a build-out that has ceased to start up again. It would not create a new killer application that makes consumers
want to go buy a personal computer. It would not fix the balance sheets of the remaining CLECs (competitive local exchanges).
But it would benefit more than 60% of the S companies I follow and it would jump-start people out of thinking that the Fed is irrelevant and pushing on a string.
What this market needs is a canny trader somewhere in government (we used to have it in Bob Rubin) who can catch everybody leaning the wrong way. Greenspan
can play that right now, especially when commodities are so weak and the dollar is so strong. It is the one moment, the one thing, no one expects.
When short rates were at 6% at the beginning of the year, a lot of people thought I made a fool of myself when I said that rates would be at 3.5% at mid-year. When
they got to 4%, lots of people started agreeing with me. I am not saying the Fed will do what I describe. I am saying that, if you are a bear, this is the disaster scenario
that you must factor into your short-selling game plan. |
