No Bear There

We’ve had so many real crises in the stock market these past few years. Can we take a second and recognize that the “crises” that drove this market down almost 1,000 Dow points recently are neither serious nor consequential? Would it be so reckless to take a breath, and ask a question or two? Then, if things are still not to our liking, we’ll jump on the panic wagon and boot our stocks to kingdom come.

Let’s analyze the catalysts one by one, look at them in a light that shows us how silly some of the stock action has been, and see how we can profit from simply not freaking out like everyone else. An autopsy of the sell-off reveals four main causes of decline: the stunning collapse of AIG, a prominent Dow Jones stock, from scandal; the rapid-fire dissolution of IBM, another Dow stock, down almost 8 percent after a totally botched quarter; a tanking auto sector; and a hawkish Federal Reserve at a time when a dovish central bank would make a heck of a lot more sense given the severe slowdown this country has seen since March. All four are much less frightening, ultimately, than they seem.

First, when one of the largest insurers in the world loses its CEO under murky circumstances, we know that the stock’s going to get poleaxed. When the CEO’s been the only CEO the company has ever had, and he’s as imperial as Maurice Greenberg—known to many as the benefactor of the New York-Presbyterian Hospital wing that towers over the FDR—we know to run as far and as fast as we can from the equity. So it is no surprise that AIG sits at a multiyear low, severely dragging down the Dow. As nasty as the chain of events that led to Greenberg’s dismissal was, this scandal lacks the one thing that has pervaded all of the other incurables (Adelphia, Enron, WorldCom) we’ve seen: balance-sheet weakness. Put simply, AIG’s businesses are strong, its balance sheet a pure beauty. In fact, the only thing that’s wrong is that Greenberg’s firm wrote some policies it shouldn’t have, policies to compensate a company if it has a shortfall in earnings. Yes, things got so loose on Wall Street during the heyday of lax regulation that insurers could insure against an earnings blowup just as surely as they could insure a Valdez-like blowout. Nevertheless, away from those ne’er-do-well policies, no one, not even the critics of Greenberg, such as Eliot Spitzer, has anything negative to say about the rest of AIG’s businesses. If AIG could just hire a graybeard, someone like Dean O’Hare, the retired CEO of Chubb, or a Bob Rubin type, to be chairman, you’d catch twenty points of upside.

Let’s analyze the catalysts one by one and see how we can profit from simply not freaking out like everyone else.

IBM’s horrific decline can’t be as easily undone by a change at the top. IBM’s problems may be related to a simultaneous peaking in both its services business and mainframe business cycle. The real issue, though, is how relevant, really, is IBM these days? Although it was the proximate cause of the Big Decline, particularly the day it lost seven points after its pre-announcement, the days of IBM’s bellwether status ended long ago. Tech’s been crummy for three years now; IBM’s simply catching up to the decline of others in the cohort. The IBM crisis is, therefore, finite, and, in the vernacular of the substantial bowling crowd on Wall Street, has no pin action to the rest of tech, which, while not doing well, is certainly doing better than IBM. I’d sell IBM, get into healthier techs (I like EMC Corp.; I see it killing IBM in both software and hardware), and stop worrying that Big Blue’s misfortune will sink the whole market like it would have back in the day when everyone alive owned it.

The continually failing fortunes of Ford and General Motors can’t really qualify as bona fide crises either. We’ve known for years that these companies have become wasting assets. Their problems, however, are more political than financial in nature. GM and Ford have become gigantic HMOs that also make cars. Their fates were sealed when America reelected the candidate who believes that legacy health care is the problem of the companies themselves, not the government. Now both Ford and GM have to find a way to pay for those skyrocketing health-care costs themselves, and they can’t. So why isn’t this enough to bring down the markets? For one, it won’t happen all at once. Wall Street is ingenious at breaking up companies and creating value, even where there isn’t any, and these companies will be able to float divisions and sell off entities that will allow them to keep their respective balls in the air for years. Eventually, the Street will run out of tricks, and a Chrysler-like bailout could await both entities, but that’s so far in the future that if you are selling the market now on their fates, you are sorely misguided.

Which leaves us with the most artificial crisis of all: the crisis of the Federal Reserve. After seven straight interest-rate tightenings, all designed to wreck the value of your home or apartment, the Federal Reserve shows no signs of slowing its jihad against your residence’s value. But March and now April are proving to be incredibly weak months for everything from Wal-Mart’s retail sales to the prices of copper and polyethylene, so the Fed’s vigilance seems misplaced. Of course, this is the same Fed that took rates to 6 percent in 2000 when the economy was rolling over. Yet it is also the same Fed that blinked and suddenly stopped tightening in 1998 when Long-Term Capital, the hedge fund, borrowed so much money from so many banks and brokerages that it could have brought them all down if the Fed didn’t start easing.

Which Fed is it this time? Wrong question. The simple truth is that the Fed can stop its vigilance anytime it wants to and simply declare victory. Or even a truce. All it needs to do is take a pass from tightening at its May meeting, and we’ll be right back to where the Dow started this hideous rollover. No, better, we’ll be at 11,000. You can’t afford to bet against the Fed after this stunning sell-off. They read the papers, too.

Although the pain may be every bit as great as if the crises were real, the pleasure that will come from the ultimate recognition that all of these factors can either be ignored or undone may soon be upon us. That’s why despite the losses, realized and unrealized, you’ve got to spurn your fears and go to work buying stocks for the inevitable snapback that occurs whenever we plunge for psychology, not facts.

James J. Cramer is co-founder of He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. At the time of this writing, he owned none of the stocks mentioned in this column. E-mail:

No Bear There