I am certainly no Jim Cramer fan, but I believe the scenario he outlines in this article is completely possible giving the cast of characters we have running the show.
Subprime May Give Fed Crisis Cover
Originally published on 2/15/2007 at 1:36 p.m.
Bring on the bad!
I wish the bears understood how important subprime lending is to my thesis about the market going higher. But then again, if they did, they would be forced to cover everything.
For as long as I have been at this game, it has taken a crisis for the Federal Reserve to move. The Fed is always reluctant to move because it needs the crisis as a cover so it doesn't look like it's soft on inflation. Maybe you think we have good growth in this country; I think we just have easy retail comparisons because of nat gas and gasoline bills being down but that in reality we're in a slump that the international portions of our great businesses are saving.
That's not enough for the Fed to cut on. That's not obvious enough.
Ah, but if all of the subprime lenders pull out of that market and if Merrill (MER - Cramer's Take - Stockpickr - Rating) and Bear (BSC - Cramer's Take - Stockpickr - Rating) and Lehman (LEH - Cramer's Take - Stockpickr - Rating) -- big subprime lenders via acquisition -- start saying "it's a crisis" and New Century (NEW - Cramer's Take - Stockpickr - Rating) goes belly-up or Accredited Home (LEND - Cramer's Take - Stockpickr - Rating) takes down a big part of its book value or Countrywide (CFC - Cramer's Take - Stockpickr - Rating) leaves the business -- then we'll have a crisis that can justify not one but maybe three or four cuts.
When you have the housing industry building a fraction of the homes it was building and credit hard to come by, you are giving Bernanke the crisis cover he needs.
Some of my friends who read RealMoney are freaking out about the negative columns that are being written about how dangerous this subprime crisis is. I'm taking those columns very seriously, which is why I am growing more bullish by the day. The fact that the Fed chairman bought into it today in front of the House of Representatives shows me that the Congressional drumbeat -- remember, prime is Republican, subprime is Democrat -- could be building and building fast.
Am I Mr. Brightside? No, I believe that subprime's awful, even worse than the bears think. When I look at the cancellations that a KB (KBH - Cramer's Take - Stockpickr - Rating) or a Toll (TOL - Cramer's Take - Stockpickr - Rating) has, I know that the same rate applies to those who took these loans down. That's maybe 30%-40%, not the 7%-10% default that their models presume when employment is this low.
If anything, they're saying there might be a fire. I say it's raging, which is why I believe the crisis is about to give us that May cut that I am counting on to take the Dow up 17% this year.
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