Soldier of Fortune

In this market, you have to sell the hope and buy the despair. In other words, short the up openings, then buy the down closes. And don’t go home owning more stock than when you arrived that morning: Overnight risk can’t be stomached in this market. It’s just too dangerous.

That’s the new mantra at Cramer, Berkowitz & Co. during these awful days on Wall Street, when the closing bell can’t come soon enough. While some talk lovingly about how buy-and-hold strategies will get them through this minefield intact, and others say, Don’t worry about it, high-quality tech stocks will always prevail, we simply try to make a few bucks every day without risking too much of our hard-earned capital. We don’t like owning stock for more than a few hours in this market. And we love selling stocks we don’t own with an eye toward buying them back at lower levels and profiting from the difference. (That’s short-selling, for market neophytes.) Capital preservation, not capital gains, is the key to success right now.

Of course, no one – except for those who are always bearish – is publicly willing to give up on this market. There’s too much at stake for everybody, from the mutual funds and brokerages to the television and Web folk. People don’t want to sell at these “low prices,” even though most tech is still valued higher than at any time in history other than the past year. “Don’t sell with this much opportunity ahead,” the gurus say in unison, despite the massive numbers of earnings “blow-ups” when companies can’t meet the expectations they set for themselves just a few months back. So each morning, new buyers come in and bet that the selling is over and we have a bottom.

And we’re glad to short them everything they want. We sell them semiconductors and cell-phone stocks. We sell them high-speed-Net-access stocks and dot-coms. We sell them software companies and customer-relations-management stocks. We sell them these securities since we know we’ll be able to buy them back at lower prices at the end of the day, because the fundamentals – the backdrop beneath all securities valuation – are eroding, not getting stronger. Most stocks don’t reflect that fundamental deterioration right away. Instead, they continue to reflect the hope and optimism that have prevailed for the last decade.

For many of you, I’m sure, our pattern of shorting anything that moves up probably seems too negative. But we have seen this market before. In fact, we have seen this same pattern of hope-in-the-morning coupled with despair-in-the-afternoon one other time. And not coincidentally, it was during the months before this great nineties bull market began. That’s right, we are now trapped in the same terrible market that we weathered ten years ago, when stocks of all sizes and types got crushed as the economy ground to a halt around the time of Iraq’s invasion of Kuwait. Then as now, oil prices spiked well beyond where people expected them to go. Then as now, we had just come through a phenomenal rise in stock-market prices, after the ‘87 Crash lows. Now we are coming off years of double-digit returns. Then as now, people expected something good to happen every day, and when it didn’t, they sold the stocks they had just bought, and bought other ones.

Of course, war solved the oil problem then. Now it won’t be so easy to solve. Stocks are more expensive now, and ownership is much more widespread, so we have harder and longer to fall. Until this year’s spike in oil, I thought we were on track for a 1994 type of market, where the Fed raised rates, slowed the economy, and prolonged the bull market. That should have made for one phenomenal buying opportunity. But this summer’s petroleum rise, coupled with deteriorating demand for telco equipment and personal computers – formerly the two hottest tech areas – has turned a moderately bearish 1994 scenario into a very bearish 1990-style market.

In case you forgot what 1990 looked like, we had all the major New York banks trading down to the single digits, massive declines in retail, and a gloom over everything industrial. My, doesn’t that sound familiar? In 1990, real-estate construction loans killed the banks’ bottom line and the Grinch stole Christmas. This time around, massive losses from junk bonds that were raised to build new phone networks are the financials’ culprit.

In 1990 at Cramer, Berkowitz, we sat on the sidelines. “Go rake leaves,” my wife would say to me when I was tempted to buy stocks. (We were working out of our farm in Bucks County then.) “Do anything but try to make money on the long side,” she said. She would occasionally short stocks that were up on hopes that something would break in the Middle East, but otherwise kept us largely in cash. She preferred that I stay outside with the True Temper in hand, where, because of my constant predilection to buy, I couldn’t do any damage to our ample cash position.

In 2000, we are also now largely in cash, but we have become far more adept at shorting. We do it pretty much every day, and it’s been yielding some pretty decent returns as cycles of hope create ideal selling opportunities. Our short-the-opening-and-buy-the-close game plan has worked every day for more than two months now.

So what gets us out of this mess? In 1991, with the success of Desert Storm, stocks soared and the great bull market really kicked in. This time around, help will have to come from the Federal
Reserve. But as long as employment stays tight – we just reported the lowest unemployment in 30 years – the Fed’s help is too far in the future to matter right now.

So we wait. Those who are in the thick of things, as we are, can join us shorting those stocks that get carried up on gossamer waves of optimism. To casual observers waiting to jump in, may I suggest that you skip the market and go rake some leaves? Let’s think about buying later, after the yard’s nice and tidy.
Monday’s new “10 Questions” feature will be a Q&A with Brian Hayward, manager of the Invesco Telecommunications fund. Don’t miss this specialist’s insights. Available for free at

James J. Cramer is manager of a hedge fund and co-founder of 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

Soldier of Fortune