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"The 'No Recession' Thesis Has Flaws"

By Jim Cramer
RealMoney.com Columnist
2/26/2008 9:38 AM EST

"The new rap, the new negative you will hear about -- at least for those looking for rate cuts -- is that January was the bottom. I am arriving at this conclusion, which I don't believe but that can be supported by some facts, the following way:

1.The rate of foreclosures actually declined in January, even as the absolute number increased.

2.Retailers are saying that February was better than January in almost every case that I have heard.

3.With hope that the $600 will be in pockets by the summer, the analysts I hear and speak to are coming around to the notion that six months from now we will be better off than we are now.

4.The big defaults have not happened and might be avoided -- see Freescale saying it can pay its obligations and deals continue to get done.

5.Whereas we had many banks and brokers on the critical list not long ago, only Citigroup (C - commentary - Cramer's Take) and Merrill (MER - commentary - Cramer's Take) remain on the ropes.

6.We have too much commodity price increase to believe that things are slipping further -- look at Alcoa (AA - commentary - Cramer's Take).

7.The backburner of MBIA (MBI - commentary - Cramer's Take) and Ambac (ABK - commentary - Cramer's Take) is almost upon us.

8.The earnings season is through, and it wasn't as bad as we thought.

All of these are hang-hat reasons to say that the recession is going to be mild and that the earnings are not going to fall apart, which is therefore an opportunity to buy given that multiples have fallen so low.

What's wrong with this thesis? I think that as long as house price depreciation is continuing -- and it is -- there is no bottom. We will simply be fighting this battle for a long time and we will limp along. But the arguments postulated give me a sense that we will have a "U"-shaped recovery, not a "V," but also not an "L."

A "U"-shaped recovery is in keeping with the early-cycle thesis and allows you to buy dips.

Will there be dips? When you have two straight up weeks as we have, you begin to question if you will have dips. Don't be ridiculous. Of course there will be dips. When Fannie Mae (FNM - commentary - Cramer's Take) reports its disastrous quarter tomorrow, you could get a dip. When Bernanke speaks, you will get a dip, although that pattern of him knocking down the market every time he speaks his unsophisticated gibberish may be so "see it coming" that every hedge fund and its brother will have the plan in place and will have to cover if he doesn't stumble too badly, although that's been a real bad bet so far.

Anyway, get used to this set of arguments the shorthand of which is, "We can't have commodities going up this much if things are so bad." That's a polite and benign way of spinning the "stagflation" story.

It's optimism that relies on anecdotes that could be enough to start creating genuine worry that the Fed won't ease more, which is therefore a double-edged sword.

Either way, taking a really deep recession off the table is never a bad thing if you are long stocks, and is the kiss of death for the big short players.

Random musings: It's good to see Office Depot (ODP - commentary - Cramer's Take) talking about cutting stores. That's always been the secret to getting a retail bottom.

At the time of publication, Cramer had no positions in the stocks mentioned. "

(in www.realmoney.com)