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[Ulisses Pereira]

"The Checklist Revisited"

By Jim Cramer
RealMoney Columnist
6/7/2010 9:57 AM EDT


"Before I can get bullish, I have to return to the checklist I put together June 2 to remind me to be careful on these up days and to remain extremely cautious and defensive.

Let's see how we are doing. First, I said financial regulations needed to be finalized. President Obama is pushing to get this done before the end of the month -- the Toronto conference. Until I see it, I ain't biting, even as I have said, repeatedly, that the bill will be benign for the industry. The group is for sale every day for reasons that are more shadow-boxing than reality. So what?

Second, we need to see the Spanish banks stabilizing. Banco Santander (STD - commentary - Trade Now) is putting up a staunch behind-the-scenes argument that it is in great shape, and I have no doubt that it is a stronger bank than the others. The problem is twofold: non-performers in Spain and tens of billions in Spanish bonds. As austerity is mandated, the government will struggle, and if it fails or the economy slows, or Spain has a terrible auction, you will see this one and Banco Bilbao (BBVA - commentary - Trade Now) get hammered. We can't lift with that threat.

Third, and pointed: We must see unemployment go down. The checklist proved its worth on Friday, as we saw what happens when employment goes bad. Today, there's a backlash from people saying that it isn't that bad, given overtime, blah, blah, blah. What's so duplicitous about these positive arguments is we the big employers should have switched into full-time hiring, but won't, or can't, because they fear a fall-off in demand (a double dip), or the amount of money it will cost to hire because of Obama and Congress. They fear Washington. (Just follow Steve Wynn's (WYNN - commentary - Trade Now) comments about why he is fed up with developing here because of the government.)

They aren't going to hire BECAUSE of that. I also see small businesses reluctant to hire for the same reasons, and they have been the engine of employment for many years in this country.

Fourth, the oil spill has to be stopped. We got good news and bad news this weekend. It looks like they are capping half of the spill -- 10,000 barrels. However, that means 20,000 barrels are still flowing, which is double what we thought/were told was flowing a few weeks ago and four times what BP told us a month ago. So, progress, but mixed news.

Fifth: China must say it is having success with its soft landing. We are specifically NOT getting that. Copper at a seven-month low shows some success, but China isn't prepared to say a thing. Plus, we have some big IPOs coming and I can't believe that is good news for that stock market. It doesn't need new supply.

Sixth, we need to see the euro hold. I wrote the checklist at $1.23 dollar/euro rate. Now it is $1.19 and showing no signs of stabilizing whatsoever.

So, let's add them up: not only is there NO progress, but I think we have slipped since I wrote this list. Now, the stock market's down from 1,102 SPX to 1,064 SPX, so the market's doing its discounting. But I think that the discounting has to be more severe - see my Friday night blog, entitled, We Are Too High -- before I consider the checklist to be "in" the market.

I am mindful of two ways to get the checklist out of the way: (1) Get 'em checked off, (2) Go to Dow 8,260, where all the systemic risk is priced in. My list is a mixture of systemic and earnings risk. If it were just the latter, we would be discounted at Dow 9,500 -- my target for earnings shortfalls. (We are going to have a bunch of them, because of Europe and because of the Gulf -- see Oceaneering International (OII - commentary - Trade Now) this morning).

One or the other: progress or lower prices. We aren't going to go higher in any meaningful way until we get these issues or prices resolved.

Many people would say I am not being rigorous by saying that price can matter and not events. They think it is duplicitous. If things are bad, why does price matter? But price ALWAYS matters -- witness the generational bottom from March of 2009.

We can solve the problems. But most likely we will go down whichever way the resolution occurs."

(in www.realmoney.com)