Now that they've stopped giving money away on Wall Street, is it still worth playing? If the dot-coms don't work, the old bricks-and-mortar outfits won, and new technology turns out to be a canard, can you still make big bucks buying stocks? And now that the initial-public-offering market has simply disappeared into thin air, is there any reason to trade stocks at all?
These are the rough questions everybody's been asking since the April nasdaq crash, when the game became, well, hardly a game anymore, more like just a lot of hard work.
I've got the answers, but they aren't what you would expect from someone who has stayed perennially optimistic since the 1982 bull was born. I think we learned a vital lesson during the first three months of this year. Sometimes, including times like now, the stock market becomes too hard for many people to do it themselves. And way too hard for you to quit your real job to stay at home and trade with a fast modem and CNBC.
I thought I would never write those words. I am the ultimate believer that this game can be played at home by amateurs. And I have an innate sense, born of my nontraditional entrance into the field of stock picking -- I learned it while I was at law school -- that you can find the right stocks by using common sense and as much time as you might devote to reading the ball scores.
But the easy game is over. And a new one has begun, one that I, as a twenty-year pro, frankly, couldn't be happier about. Whereas before it was a game of chance with odds stacked heavily in favor of buyers, now it is a game of skill between buyers and sellers. This suits my talents perfectly, because I am not a technician given to riding trends, something that many of the now-blown-out newbies were. I try to figure out which company is beating out which other company to produce the best cable modems or the best DSL switches. I bet on the potential winner, and I short the stinker. Before the April crash, I would make money on the winner when it came in, but the stinker would take me apart on the short side because the market was incredibly indiscriminate. Every horse came in first!
Now my homework is my advantage. My reading of research, talking to companies, and trying to assess how businesses are really doing is, at last, making me more money than it is costing me, as the era of all boats' rising has gone out with the mindlessly bullish tide.
These stocks are strictly whites-of-their-eyes situations. You can't buy them until they tell you that everything is terrible, which they will do when they report earnings. That is the time to pounce.
So where does that leave you? First, ask yourself: Do you want to be the client, the manager, or me? When the panic struck this spring, did you average down coolly, buy more, take advantage of the dips in the best stocks, and make calculated decisions about what could be kept and what was just ballast ready to be jettisoned over the side? Or did you panic and kick them all out near the bottom? Did you tire of it? Did it sicken you? When you went to Shea, did you find yourself averting your eyes rather than look at those closing prices on the Reuters scoreboard? Does your clicker now skip CNBC and go right back to ESPN, where it used to reside before the big downturn?
If you bailed because you simply couldn't take the pain, you may be a candidate to have someone help you. That panic selling into bottoms happens because you don't really know your own risk tolerance and you probably didn't do any homework. Next time you can scrape up a few bucks, try being the client for a while. Give your money to a mutual-fund or a money manager, or set up a full-service brokerage account. The disrepute the plain old brokers got tarred with during the heyday of do-it-yourselfing seems a little undeserved right now, doesn't it?
But it is possible that you've got a taste for doing it yourself, no matter how painful it was, and you still want to be me. You want to get back in the trenches, hook up your high-speed phone line, switch on CNBC, and turn those symbols moving along the bottom of the screen into more dollars. To which I say, great, the more the merrier -- but understand, it is not enough these days to know only how to buy. You also have to know how to sell. And how to go short. And how to avoid sand traps.
You just need some guidelines and some help picking the right stocks. You need to know what works and what doesn't, what is right and what is wrong. That's where I come in. I can give you a perspective on what I think will work for the second half of this year, a menu that will help you pick what might suit you, without shoving the choices down your throat.
This first year of the millennium is shaping up remarkably like a period six years ago, in 1994, when the economy came into the year just blazing. Then, as now, the Fed raised rates. Then, as now, people felt the rate hikes weren't really slowing the market down, and the bears had huge doubts about whether the Fed could manage what is known as a soft landing. Just think about those times when you bounce crazily after your plane's tires hit the tarmac, and you will know what the Fed is trying to avoid. Those who doubt the Fed are . . . let's see, how can I be diplomatic about this? How about stupid and dead wrong?
The Fed will land the airplane safely, just as it did in 1994. In fact, the time line is so similar that we are simply using the exact air-traffic controller's guide that made us big money in that last slowdown.
In a soft-landing scenario, the first stocks that work are those that do well regardless of whether the Fed lands gently or cracks the fuselage in the process, such as the food and the drug stocks. We like Pfizer because of the synergies that you get from the recent merger with Warner-Lambert and American Home Products, which is being kept down by fears, we think overblown, about coming fen-phen court judgments. In the foods, the best-performing sector of the last quarter, we like General Mills, a real sleeper, and Kraft, which can be owned only if you buy Philip Morris. We have made our peace, ethically, with the latter -- we hate what they do with a passion -- but we are entrusted with making money for people. I am not being glib; this company, when it spins off Kraft, should go up big, and in the meantime you get a giant and, we think, safe dividend because too many states need the money from Philip Morris to make their health-care budgets.
This quarter, however, we are plunging into the financial stocks. These have been battered and tarnished by the rapidly rising short rates, the ones the Fed uses to engineer the soft landing, but we think that is now "in the stocks." What is not in the stocks is the giant cash flow these companies spin off as well as the huge fees they now take in. Our two favorites are close to home: Citigroup, which is well run by Sandy Weill, and Chase Manhattan Bank, which has a great corporate-bond department and a venture-capital arm, Chase Capital Partners, that has actually weighed the stock down of late out of fears that dot-coms were going belly-up. Talk about the price of pessimism creating a great opportunity. We also plan on buying some Goldman Sachs during the upcoming secondary for exiting partners. Why not? This stock has already felt the downturn. But its franchise is more intact than ever, and it could always be bought by still another bank if its price doesn't rise substantially. Morgan Stanley Dean Witter and Schwab are no slouches, either, and boring Bank America has its attraction, too. This group is extremely out of favor, just what you want when the Fed finishes its tightening.
Beginning in a few weeks, once all the quarterly earnings are out, we will begin to move aggressively into cyclical stocks that have been totally given up on during the big rate hikes and the giant increase in the price of oil. We are currently eyeing both General Motors and Ford and have begun to build a substantial position in Boeing, the daddy of all cyclicals, which seems to be enjoying its first turn in orders in half a decade. We don't want to jump the gun, though. These stocks are strictly whites-of-their-eyes situations. You can't buy them until they tell you that everything is terrible -- which they will do when they report earnings. That is the time to pounce.
Of course, we are not abandoning technology, which did extremely well in this part of the calendar back in 1994. But tech has had such a run off the April-May bottom that we are being more selective than we have been in years. We still own Intel, for example, but we are reluctant to buy any more. Same with Sun Micro and Nokia, which have enjoyed enormous runs. We continue to add to our positions in Cisco on weakness, but even that great company has rallied too much for our tastes and we prefer Nortel to its major networking rival. Alas, only Microsoft has been brought so low that we find ourselves still purchasing it aggressively.
Do you just plunge in now, with money waiting on the sidelines, getting full up with these stocks right after you put down the magazine? Absolutely not. This market is uncertain at best. It has fits and starts and goes up and down on a whim. Use the craziness to your advantage. You want to buy 500 shares of Boeing at $44? Don't. Buy 100 shares there, at the market. Then put in a limit order to buy another 200 down two points. And then the final 200 down another two. Worst that happens? Boeing takes off, and all you have is 100 shares. Best? Boeing goes down and you get to buy it at great prices before it starts its climb back. That's letting the whims work for you.
We think individual stocks have plenty of room to romp once the soft landing is complete, just as they did in 1995, one of the biggest years in the market in recent memory. So it would be wrong to sit out the market until the all-clear is sounded by the Fed. That's always way too late to act on. But do it so you won't regret it if the market gets hammered for who knows what reason in the days after your purchases. Do it wisely. If you can't, again, get someone to help you. And above all, stay off margin. We are big boys with credit lines up the wazoo, and we use margin only when we absolutely need it -- and even then only for a few days at a time. We know plenty of managers and individuals who have beaten us over short periods of time by using giant dollops of debt. But not one of them survived the most recent downturn, or any of the other downturns, for that matter. Get invested slowly, keep plenty of cash on hand, and remember, when they throw a sale on Wall Street, it is a lot like Main Street: You have to be ready to take advantage of it. Just be sure that the merchandise isn't broken or damaged, with no holes in its financial balance sheet, and you will do just fine.
Starting today, the "10 Questions" feature on TheStreet.com will be a Q&A with Jim Schmidt, portfolio manager of the John Hancock Financial Industries fund. Available free at www.thestreet.com.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had positions in American Home Products, Boeing, Cisco, General Mills, Intel, Microsoft, Nokia, Northern Telephone, and Sun Microsystems. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites comments at