How to play a federal debt default

If it happens, look to these companies to keep your portfolio alive.

By Jim Cramer Oct 8, 2013 10:09AM

Amazon.com logo © Spencer Platt/Getty ImagesFor some companies, a federal default, or at least a whiff of it, is a terrible thing to waste. ThereTheStreet logo are companies that are so itching to get their hands on their own stock that any pending sell-off might be a remarkable moment for them, as they know their businesses won't be that badly affected by even an actual default, because they think they have seen the movie before when Lehman Bros. defaulted.

 

So I think they will buy with both hands, knowing that eventually the government will cure the default, even if it's painful and while nothing saved us from Lehman and the money just vanished.

 

Now, let's understand each other. A default, an out-and-out default, would be cataclysmic, and I think the president will not risk being the only president ever to default on the national debt. When historians look back, they won't remember the speaker of the House; they will remember the president. That's a weighty thing to be tabbed with. But as long as the interest on the debt keeps being paid, in some form or another, even if it means other services really are shut and other payouts really are curtailed, there will be no default.

 

The economy would be crushed. Of that, there can be little doubt. You can't have the $60 billion a day that the government pays out, at least according to the Treasury secretary, not spent and think the economy won't collapse. That's just a gigantic swath of checks that would no longer be in the mail.

 

At that point, the economic pain would be too hard for even the most obstinate of those who refuse to vote in favor of a debt ceiling increase, so we have to figure things will finally budge. Obviously, we hope it never gets to that. But the idea that it is as unlikely as a meteor hitting Washington, D.C., or a 1-in-10 million shot or whatever hyperbole we keep hearing, just flies in the face of the anger, bitterness and rancor that match the level of partisanship at the time of the Civil War.

 

In fact, the amazing thing about this moment is how so few people are worried about it, not how many are. And that's probably a mistake, given the intense hatred that has basically thrown the playbook out the window. The playbook comes back into the window when the economy really gets hurt, though, although it would be really hard to tell without government data. Somehow, I think we would feel it.

 

Now many companies will claim they want to take a longer-term view and sit and wait. But some companies like to take a short-term view, which is why they will take action right into whatever occurs. I say "whatever" because we really don't know what will occur.

Who has that luxury?

 

There are a handful of companies that truly love a crisis and use it to get their stocks at phenomenal prices. The executives have faith in themselves. The executives have faith in their companies. We know their buybacks are backed by the full faith and credit of their enterprises.

 

First up? I think it has to be GameStop (GME). When everyone, including yours truly, was scared to death about a gaming business that had to be in secular decline and with Amazon (AMZN) picking up whatever's left of the sales, what did the world's largest gaming retailer do? How about pay down all of its debt and buy back about a third of the company. That's right, just when everyone was fretting, GameStop, run by Paul Raines, took a look at the world and declared it good. Paul knew that the hardware game cycle was about to kick in.

 

He realized that he could take share from whoever was left. He understood that the new iterations of games were amazing. He anticipated all of this and bought back a ton of stock at much lower prices. Now that the new Microsoft (MSFT) and Sony (SNE) machines are almost in the stores and "Grand Theft Auto" is proving to be the greatest money-making game of all time, do you think he's going to sit on his hands as the stock comes in? I think he sits there and buys with both hands, especially given that he thinks 2014 is going to be good and 2015 is better.

 

Don't forget, this company has a substantial European business that has just started to get better. And GameStop is one of only 24 companies in the S&P 500 with no debt, although it is the only one I would not be worried about when it comes to a debt-related recession. Thirty-one million loyal gamers are not walking away from GameStop just when the getting's good.

 

Next up? How about these incredible media stocks? Take a look at the amount of stock that's been bought in at Viacom (VIA.B). About 716 million shares were outstanding just before the beginning of the great recession. Now? How about 491 million shares? This company, with fabulous cable brands, just prints money and then it uses the money to buy back stock. It particularly likes to buy on bad days and it seems like the buyback isn't on autopilot. I bet Sumner Redstone's Viacom will be bidding for every share that comes in. Will CBS (CBS), another company owned by Redstone, be any different? I see the share count dropping to 624 billion now from 771 million in 2006 and that's going to continue to shrink if this debt-related artificial calamity occurs.

 

There must be something in the water at these media companies. Seven years ago, Time Warner (TWX) had 1.4 billion shares outstanding. Now it has 950 million. There' a company willing to buy in everything that moves. AOL (AOL), once owned, disastrously I might add, by Time Warner, in two years has taken share count to 81 million from 106 million. You should be in there with Jeff Bewkes and Tim Armstrong, as they have faith in their cash generation and are deploying that capital in a smart way.

 

How about Wyndham Worldwide (WYN)? Under Steve Holmes, this hospitality company just seems addicted to doing right by shareholders. Four years ago there were 182 million shares of Wyndham outstanding. Now there are 136 million for this hotel and time-share exchange company. Every time we have had Steve on, he has said the same thing. He's giving back the money to shareholders that the company doesn't need to grow. And that's why this one's such a long-term winner.

 

Finally, there's a company that hasn't done that well lately because the economy's a little too strong for its business: Autozone (AZO). The market's convinced that a too-strong economy makes it less likely that we will fix our cars ourselves and more likely that we will just go buy a new one. Meanwhile, Autozone doesn't care. It just takes that cash and keeps buying and when the economy downshifts, you will be glad they did. In six years the company has literally bought half the shares outstanding. Don't you think it will have a field day as the food fight in Washington continues? I think it will.

 

Monday I talked about dividends as a way to protect yourself, and I reiterate that those are terrific safety nets. But I think that when we look at the calendar, when we look at where we are in the year and how little time is left, it is reasonable to think that these large institutional buyers are well aware of the patterns I am talking about. They will be fighting with GameStop, Viacom, CBS, Time Warner, AOL, Wyndham Worldwide and Autozone for every share. Which is why these are natural places to be bidding on cataclysmic days. If the companies weren't worried and bought all through the Great Recession, which was real and lasting, don't you think they will be buying through the debt ceiling debacle, which is phony and not lasting?

 

Yeah, me too.

Jim Cramer's headshot


Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.

 




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148Comments
Oct 8, 2013 10:44AM
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So sick of all this "default" talk.  The reason we're not "worried", Cramer, is because it's not a legitimate concern.  The US Treasury has debt payments of $25 billion/month.  They are collecting $230 billion/month in revenues.  There's plenty of money to make the debt payments, fully fund SS, medicare, entitlements, etc...  There's also enough to pay most contractors, vendors, employees etc...  There's no legitimate way we're going to default.

The gov needs to do its job, set priorities, fund what is necessary and what it can afford, and trim the rest.
Oct 8, 2013 11:28AM
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"meteor hitting Washington, D.C" ....... Quit getting our hopes up Bobo.
Oct 8, 2013 1:23PM
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It didn’t happen all at once, but the dream that was the United States of America, the Great Republic, has died. Other countries hostile to the idea of true freedom didn’t cause it; it wasn’t caused by a radical religious organization. The downfall of the United States was all from within its own borders, by its own people. The people, for whom others have died, have allowed the country to die a slow death. The me too, me first attitude that started many years ago, along with the idea that all are entitled to the fruits of others hard work, has allowed this country to bleed to death. When the British raised the tax on tea, our forefathers should have just shut up and paid the tax. Almost 240 years later, what has changed? Thousands have died for absolutely nothing.

Oct 8, 2013 11:20AM
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Five Republicans just spoke to the Media .., insisting Mr Obama speak
with them ... they held out an olive branch.  Come on, Mr Obama ... lead  .. speak with them ....  accept!!!!   You can end this madness.

Oct 8, 2013 10:52AM
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Is it possible that some of these companies have a long-term, unwritten goal of going private?  Autozone has bought up half of their outstanding shares -  privatization has to be on the table as a viable option.
Oct 8, 2013 11:32AM
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Wise words from Jim Cramer -- A default, an out-and-out default, would be cataclysmic, and I think the president will not risk being the only president ever to default on the national debt. When historians look back, they won't remember the speaker of the House; they will remember the president.
Oct 8, 2013 12:02PM
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Wall Street licks it's chops with any news that has a small possibility of effecting the financial outcome of something! Wall Street is using the "Old Fear Game" to promote cash in their pocket and drive the market lower!  When will investors quit playing Wall Street's game and become the leaders of the game? How pathetic can people be?
Oct 8, 2013 10:30AM
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certainly!  when things crash, all stocks go on a serious sidewalk sale.  but buy the GOOD STUFF. 

 

which circles back to the real questions of "so what is the good stuff?"

 

......i wonder if the typical 401K mutual fund managers will have a brain to buy the good stuff?

Oct 8, 2013 12:43PM
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Get out your own pencil and do your own financial math. If taxes were only on final consumption, when you buy $100 in groceries the taxes would be $5 for local taxes ( that is a bargain), $25 for state taxes (Utah), and $29 for federal taxes, plus $14 to pay off the federal debt (17 trillion, 5% interest, 15 years). That is $100 for groceries plus $73 in taxes. Those groceries cost you $173. Then add unfunded liabilities and there is no way we can pay the tax bill. Plus we have a short time to handle this or we are going to be too far in debt to ever get out. Bankruptcy does some wonderful things. 1. It removes obsolete management and ideas. (Our political and economic structure will change completely) 2. It reevaluates and redistributes the assets. (Housing, stock market, farmland, etc.) 3. It wipes out the creditors. (A Treasury note and toilet paper will have the same value). For God sake America wake up, we are the ones responsible, not the government, and we are the ones that are going to be in deep sh**.

Oct 8, 2013 12:17PM
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Berkshire Hathaway is a better security than 7 day U.S. treasuries.
Oct 8, 2013 1:26PM
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Close TSA.  Unless the airlines contract Hooters for security, BOYCOTT THEM.
Oct 8, 2013 11:37AM
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Any talk of a debt default is just a waste of breath.  There will be no default.  It is irresponsible of the President to even bring it up.  He'd be impeached if he ordered the Treasury to stop payment.  He might even be prosecuted.
Oct 8, 2013 11:19AM
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How to play the default -- Mr Cramer, to paraphrase what a congressional leader said, this is not a game!!!
Oct 8, 2013 10:40AM
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Maintaining pricing power is the rule of the jungle for now and will continue.  Pricing power through either licensing or having that historical unusual niche is the power you want in a constricting economy.  Most all these Jim has mentioned fall into that category.  JMHO
Oct 8, 2013 1:00PM
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Now isn't the time to get frustrated and walk away or get disgusted.  To do so in a way is their goal, and not one side but both.  Now is the time to listen and calculate.  Save your powder until the proposal then scream.  This going on right now is what is referred to as foreplay. So I don't have to tell you what comes next.
Oct 8, 2013 11:37AM
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The debt ceiling crisis is not about the budget or deficit it's about the constitution and our democracy. The President has to tell the Tea Party minority in the House that they cannot use blackmail to get their way.  Congress needs to create a budget, which they haven't done for several years, that cuts spending to a level sustainable at current and project tax revenue levels. That will mean cuts in all programs and increased taxes. The rhetoric about ACA, Medicare and Social Security being the main issues is not true. The government has borrowed and must repay $4 trillion to the SSA Trust Fund. The government must stop spending taxpayers money policing the world and fixing everybody's economic and social problems.  No new spending should be allowed unless taxes are raised. Let's have the debate and crisis now and get it over sooner rather then latter.
Oct 8, 2013 2:31PM
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Mr Obama, if the Tea Party  GOP is holding America to ransom, why do you not report them to the police ...?  You are a lawyer.  Ransom is a crime.
Oct 8, 2013 4:00PM
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By the Way, SuperRich are buying Doomsday Condo Shelters like they are Hot Cakes while Congress and the President have the same or better built via our Tax Dollars. So not only will they have stolen all our Wages, they plan to survive the Apocalypse they created with out Money.

But sure, the idiots know what's coming. We better hope not. They are preparing for Doomsday, what about the rest of the World.

Oct 8, 2013 3:33PM
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GEE,CL is in a bad mood today.It must be that time of month.Wait, she`s too old for that.

HOT FLASHES !

Oct 8, 2013 6:30PM
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Hey barry ....so you are crowing about a "vagina free zone" ......just like your life for the last 15 years eh????  :)
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