The best way to sustain Friday's late rally is for the government to cut a back-room deal with the largest banks and brokerages to get them to start making loans again, Jim Cramer told viewers on his "Mad Money" TV show on Friday.
On a day when Dow closed down 128 points after another extremely volatile session, Cramer said this "secret" meeting is necessary to get the economy, credit markets and stock markets rolling again and avoid a repeat of this past week's brutal market.
Cramer said he would have the Federal Reserve take the initiative by inviting to the meeting the CEOs of large financial institutions such as Citigroup(
C ), Bank of America(
BAC ), Wells Fargo(
WF ), JP Morgan(
JPM )Morgan Stanley(
MS), and Goldman Sachs(
GS ), the latter three of which he owns for his Action Alerts PLUS portfolio.
Cramer said the Fed would tell the CEOs that it would not repeat the mistake it made when it allowed Lehman Bros to fail. Instead, he said, the Fed would do all that it can to get the financial institutions open for business again.
He said the Fed would guarantee all their debts as well as their brokerage, savings and corporate accounts. Furthermore it would allow them to pay off their bonds with federal money, permit them to sell their credit default swaps lower and provide them $100 billion each to lend.
In return, these financial institutions would have to live up to their end of the bargain by "opening the spigots" and make loans again. He said the loans will be targeted to corporations, small businesses and individuals - but not hedge funds.
He also said the Fed would have the financial institutions divvy up the "bad banks" among themselves, with the aim of having them assume the good deposits while selling the bad assets to the federal government's newly created Troubled Asset Recovery Program.
Cramer said that after the market's worst-ever weekly drop it's "time to change our incredibly negative bias," as stocks are no longer in endless sell mode.
For Cramer it's time to rent some stocks, with a look at owning longer term if the market again approaches the lows seen on Friday. Cramer believes the market will chase those lows since the market rarely bottoms on a Friday, and the snapback by stocks was too far, too fast.
That means a new game plan is needed for the cash that Cramer told traders to peel off last month.
Expecting a gap down on both Monday and Tuesday, Cramer advises putting 25% of that cash back in play on both days. As usual, Cramer is against buying all at once.
As for where to put it, Cramer offered a stock like Kellogg(
K ) as a template, based on its rallying behavior a year after the 1987 crash.
Of course, Cramer said this isn't 1987 - times are a lot worse. Given that, Cramer suggests loooking at companies that are trading around their cash on hand, such as KBR(
KBR ).
You should also look at companies that make products that you eat, such as Kraft(KFT), Heinz(
HNZ ), Coca-Cola(
KO ) and Altria(
MO ). Cramer owns Kraft and Altria in his Action Alerts Plus portfolio.
Cramer also likes giant pharmaceutial Merck(
MRK ), cyclical plays Nucor(
NUE )and Freeport McMoRan(
FCX ), which he also owns for his Action Alerts PLUS portfolio, but reminded viewers that you only want a small position with the last two, since they aren't self-financing.
Cramer would be careful with financials, but he likes US Bancorp(
USB ), and threw in a recommendation for Duke Energy(
DUK ).
The new leadership is companies that don't need money, Cramer said.
Half-Empty
Cramer likes that traders dodged a bullet on Friday, with a "spectacular" rally off the lows of the morning, but he believes it's important to lay out the worst-case scenario so investors can go forward "with their eyes open."
In the worst case, the model isn't the 1987 market crash, which saw equities bounce back only a year later, but a "1929 scenario" which brought an 89% peak-to-trough drop and a "decline that just wouldn't quit."
In that model, Cramer said, currently flailing stocks like U.S. Steel(
X ) and General Motors(
GM ) wouldn't be done yet.
Cramer said that unfortunately the parallels with the 1929 crash are too close for comfort. As in 1929, he explained, we have a presidential administration that's in over its head. Listening to Bush say the government taking necessary actions to solve the crisis is like President Herbert Hoover saying than that the worst is behind us.
Cramer noted the market's tanking after Bush's most recent comments about the market, as well as the similarities of a Federal Reserve too focused on inflation and a wave of bank failures.
Cramer said he believes the federal bailout plan can help, but that a second Great Depression is still on the table. "That's why you have to be careful with your buying," he said.
Published By TheStreet.com
Labels: BAC, Bank of America, C, Citigroup Inc., Goldman Sachs Inc., GS, HNZ, Jim Cramer, JP Morgan Chase and Co., JPM, K, KBR, KFT, KO, Mad Money, Merck, Morgan Stanley, MS, Wells Fargo, WFC
