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"Plotting the Course"

By Jim Cramer
RealMoney.com Columnist
4/21/2008 7:41 AM EDT



"How high can we go? That's pretty much the only question worth asking after you put in a bottom, as we did after the Bear Stearns (BSC - commentary - Cramer's Take) collapse.




Nobody's talking about a new bull market. But let me give you some thoughts about what has happened in the past few weeks to make it so that you could become more positive.

First, we went down so much because the systemic risk in the biggest part of the S&P, the financials, was overwhelming. It is why we "overcorrected" because the market feared -- and shorts pressed their bets -- that the following institutions could go under: Bear Stearns, Washington Mutual (WM - commentary - Cramer's Take), Wachovia (WB - commentary - Cramer's Take) -- yes, Wachovia, because of the miserable buy of what turned out to be a really reckless lender, Golden West -- Lehman Brothers (LEH - commentary - Cramer's Take), Merrill Lynch (MER - commentary - Cramer's Take), Citigroup (C - commentary - Cramer's Take), National City (NCC - commentary - Cramer's Take), Capital One (COF - commentary - Cramer's Take) and even Wells Fargo (WFC - commentary - Cramer's Take). Fannie (FNM - commentary - Cramer's Take) and Freddie (FRE - commentary - Cramer's Take), too.

We also felt that the Fed and Treasury would not be engaged, or might not even care.

Bear changed all of that because the regulation of the banks shifted from the Fed to Treasury, and Bob Steel at the Treasury wasn't going to let the whole shebang go under on his watch, as it very well could have under the Federal Reserve. Steel spoke the language, knew the players. Bernanke knew none of them and was totally reliant on the New York Fed, which had failed repeatedly to create programs that could turn around the situation. The move by Treasury was a total surprise given Hank Paulson's inept handling of the implicit guarantee of agency paper, which of course broke the back of Bear and almost broke the bank of Lehman, as suddenly you needed real collateral for paper that had been considered sacrosanct.

Once you had Bear saved, you knew you had a backstop for all the rest. The fact that we didn't go down, let alone crash, after that Sunday shotgun wedding between Bear and JPMorgan (JPM - commentary - Cramer's Take) was the bottom, and that's what people are grasping.

Now we have taken off the table the collapse of Lehman with the bond issue, although the bears don't want to believe that; Wachovia and Washington Mutual with cash infusions (soon National City, too); Citigroup with a breakup (we all see that happening) and better-than-expected revenues; and Wells because it is an obvious choice for Treasury's next anointed acquirer. Merrill Lynch doesn't need capital, there was only so much damage that could be done by First Franklin. Meanwhile, the leveraged loan market is being freed up, allowing banks to raise more capital even if they take realized losses. In previous tough times, many of these last deals would have already blown up. The worst, Freescale, is still alive and kicking (even though maybe it shouldn't be).

Other outfits, CIT (CIT - commentary - Cramer's Take) and E*Trade (ETFC - commentary - Cramer's Take), proved more resilient. Capital One may still be considered a good short, but the defaults aren't that high, especially for credit cards, and the bears can do their best to raid it with lies but they can't do much to destroy it. Bank of America (BAC - commentary - Cramer's Take)? It got pantsed when it paid too much for Countrywide (CFC - commentary - Cramer's Take), which probably would have been a casualty otherwise, but it will muddle through and at one point will be a buy. And it was obviously an awful quarter. But they ain't going out of business -- it's just a bad place right now, nothing more.

Retail's terrible, but if the worst that happens is a failure of Linens 'n Things, which was ridiculously levered, and a couple of bank lines pull from Talbots (TLB - commentary - Cramer's Take), who cares? We haven't had retail bankruptcies galore, and that's surprising too given that we used to have them even when the economies were good. Restaurants stink, but they hang in. Again, even in good times we have lost restaurants; if the worst is Ruby Tuesday's (RT - commentary - Cramer's Take), who the heck cares? It was never that hot a place to eat anyway.

Homebuilders? Sorry -- no bankruptcies there, either. That's a preposterous thing, given what has happened, but it is a reality. The banks didn't close them down. They could have; they didn't. They are all going to make it, and some will prosper beyond what we think possible because all of the mom and pops are out of business; that's how bad this moment is. It's a good group, we all know it. We are worried about silly things like HGX resistance. Give me a break.

Those are the only segments of the S&P that are bad, and because of endless shrinkage of their capitalization, they are turning out to be less important to the overall direction of the market than ever before. More important? Industrials, oils and gases -- by leaps and bounds -- ag, foods and drugs (weak dollar and I expect large gains in drugs post-election). The utilities and transports are big. The latter is in the midst, ex-airlines, of a simply miraculous run and it isn't ending, I think it will broaden to shipping now that the world is not going into a recession and those stocks reflected it. I like Frontline (FRO - commentary - Cramer's Take). Others, more-risky dry shipping players, now seem like good bet, too.

Tech proved more resilient and has already had the stuffing kicked out of it. (Most of the big tech stocks have been at the same prices for years, so big deal.) Intel (INTC - commentary - Cramer's Take), Cisco (CSCO - commentary - Cramer's Take), Microsoft (MSFT - commentary - Cramer's Take), Oracle (ORCL - commentary - Cramer's Take): They've done nothing for years. They could do nothing and it won't matter much; or they could drift higher and their multiples will still be cheap. More an opportunity than a challenge.

We have some phone companies that yield too much to be worried about. Defense keeps growing as a percentage of the S&P. Basically, there is too much good, and not that much expensive.

So, the logical issue is where do we go from here? I say we go up. Not in a straight line, because we had things like expiration last week that ramped up things unnaturally, including Schlumberger (SLB - commentary - Cramer's Take) and Google (GOOG - commentary - Cramer's Take), and then all that were associated with it.

But the bottom line is that things are simply better in the market, not the economy.

That's good; they lead. Economy follows. Every time, including this time. "

(in www.realmoney.com)