Washington pulls the rug out from under us

With the recovery possibly stalled, here are 3 indicators that would signal the selling is over.

By Jim Cramer Nov 15, 2012 9:54AM

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CorbisIt's indisputable that we were about to take off in this domestic economy after a slow recovery from the recession.


The twin trends of a return to a slow climb in the value of housing as well as the renaissance of industry courtesy of cheap natural gas were enough to get things rolling. The lack of new construction, the age of the average car -- 11 years -- the need to be able to get out of your in-laws' house and buy housing of your own, something that had actually been put on hold, all of these had created what looked to be a sustainable recovery, despite the problems in Europe that were clearly worsening.


You don't get fantastic numbers for companies as varied as PetSmart (PETM), Cisco (CISCO), Home Depot (HD), Kors (KORS), TJX (TJX), as well as Boeing (BA), Ford (F) (domestic), Dow Chemical (DOW) (domestic) and pretty much every consumer packaged goods, aerospace, telecom and health play if things aren't improving. Yes, we can complain about the earnings, but the retail, restaurant, housing and auto industries were all doing incredibly well as recently as October and the question was going to be, I believe, how much longer can the Federal Reserve stay accommodative in 2013 if these trends pick up. It's really only the companies that have moved aggressively into Europe and those that depend on Asia for marginal growth that have been really hurting. And we have had enough hopeful signs in China for me to believe that 2013 could be a good year for the companies depending on the Peoples Republic of China for its recovery.


All of these trends meant that the most important statistic, the one that is most correlative to the stock market -- employment -- was going to turn up in 2013. That was going to be the elixir that made it worthwhile to be bold and buy aggressively.


Suddenly, all of that is out the window. Suddenly, none of it matters. Once again, Washington has pulled the rug right from underneath us and every one of those positives is now either being overlooked or simply doesn't matter because it is about to change for the worse.


That's what we saw Wednesday with that awful press conference where the president made it pretty clear that there is no hope for anything to happen quickly to resolve what 2013 is going to look like and we are going to see sharp increases in taxes and sharp declines in spending that can trump all of the good news we have been seeing. There's simply no need to hire and plenty of reason to fire until we get there and the smartest executives are going to be like Dave Cote from Honeywell (HON) and not hire to respond to the regular retirement quota that occurs naturally at big American companies.

That means stage one is now upon us: the recovery will be broken by this logjam. That's what it does. I don't even know if you can refute that.


Stage one is hitting with brutal force and it is dragging the averages down quickly. Keep in mind that the Dow Jones is now only up about a couple of percent, less than many European stock markets, including France, and is up only about 1/6 as much as Germany. In stage one everything is guilty until proven innocent, including the companies that are just now reporting blowouts.


Stage two? That's when we try to figure if the selling is done or if it is overdone. The first means you have to pick, the second means you have to buy. The swiftness in which this is all happening, accelerated by hedge funds that remember how they lost their year last year very quickly by not acting, will make it so the selling runs its course before we run over the cliff.


But how do you monitor it to be sure?


Let me give you three ways that are going to put it in a workable context for you.


The first is the Washington-on-TV indicator. This is a simple, easily monitored and perhaps the most important of all indicators. That's when the president or any of the leadership from the Republicans or any of their important minions utters anything about the fiscal cliff.


Right now we know that we aren't on track for a resolution. Time, distractions (Petraues), rancor, they are all against a deal. There is no move to rise above yet.


That means every time someone comes on television you can expect the market to go down. Don't trust any initial bursts of optimism before or after a soundbite unless it is from both parties at once standing at a podium saying "we have a deal." Use Wednesday as a template. When you see or hear about a presidential event, be ready.


We will know when we are close to a deal or when we are done going down because the fiscal cliff is now "in" or fully discounted in the market. That's when we don't go down within the hour after a speech. That's it. That's what's been my indicator in all of Washington's impact on the market over a 30-year period. If we stop going down on talk, then we are at a bottom.


Second, we have the purest of pure plays out there in Lockheed-Martin (LMT). It is a total canary in a coal mine. It's a good company, despite the recent management upheaval, with an outsized 5% yield that will be worth much less after taxes after December.


It got hammered Wednesday, as it should. It will be right in the cross hairs of the government's crosshairs and the fact that it is up 8% for the year is totally absurd if we are going to go off the cliff. This one should be front and center at the upper left on your screen. It might as well be the thermometer for the market and it is a perfect one.


The third? Let's call it the Cisco, Home Depot and PetSmart indicator. These are the three biggest upside surprises since the election and they correctly capture discretionary retail, housing and technology spend. If these stocks cannot hold their gains, no stocks can right now except higher-yielding stocks that are regarded as recession proof, like Coca-Cola(KO), Kellogg (K), General Mills (GIS), Verizon (VZ) and AT&T (T).

Of course we have to monitor employment. We need to look at aggregate retail sales, transports -- they were hideous Wednesday -- and any of the broader commodities like copper and oil to monitor how deep the slowdown will be or if it just rolls right into recession, which is what the stock market's telling us is going to happen. No, that's not too dire.


But those three indicators will tell us if the bad news is in or not and will allow us to begin to speculate that the stock market itself has Washington worried and is therefore somewhat self-correcting.


Of course, there is an orderly path to make it so the slowdown doesn't occur and the cuts aren't all that harmful and the increases not all that hideous. That's why we were not tanking before the election. There was so much momentum going Romney's way in the market that the cliff's harms could be ignored.


No more momentum. No more Romney. No more ignoring.


So watch those indicators. Recognize that the good news is ephemeral and the bad news transcendent. Make some sales of economically-sensitive companies of all stripes that don't have higher-yielding protection and watch those signs.


They will get you through this and, yes, we will get through this, even as we have to admit that the odds for going over the cliff have now increased greatly because the sniping's just begun.



JimCramer's face


Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and is long BA and KO.



More from TheStreet.com

Nov 15, 2012 12:56PM
Due to Obama care businesses will convert most full time jobs to part time in order to not provide health care insurance to employees. This will cause americans to buy their own health insurance on part time wages and if they don't buy health insurance, they will have to pay a government tax penalty. Employee benefits are disappearing rapidly and now alot of jobs are called "contract jobs" or 1099 which is basically a self-employed job with no benefits. America has went to hell.
Nov 15, 2012 12:52PM
Due to Obama care businesses will convert most full time jobs to part time in order to not provide health care insurance to employees.  This will cause americans to buy their own health insurance on part time wages and if they don't buy health insurance, they will have to pay a government tax penalty.  Employee benefits are disappearing rapidly and now alot of jobs are called "contract jobs" or 1099 which is basically a self-employed job with no benefits.  America has went to hell.
Nov 15, 2012 12:52PM
Nov 15, 2012 12:51PM

One of the very first lessons I learned in investing was to discount any predictions made by Cramer.

He opens this piece saying th economy was ready to take off?


A false narrative created by a slobbering mainstream media hoping to sway an election. 

Nov 15, 2012 12:51PM
THE GREAT DEPRESSION CONTINUES ,there has never been a recovery
Nov 15, 2012 12:50PM

Putting all your money over seas Mirage Guy. HHmmmmm

Where is this great investment over seas, Japan, Europe?  Guess what if you think the USA is misleading people with it's economic numbers then you don't want to know about China.  Some good reporting I saw last night on CBC, not from the left or right but just good reporting.  They travelled the country side, saw yards full of rusting un-used steel, piles of coal not being used, entire cities that were built in the non-coastal provinces that could hold up to a million people, siting empty with maybe 20,000 people.  They built these cities assuming the growth their would go on forever, because you know it always does right?  Now they are empty as the expansion in-land never really happened.  Go ahead, invest overseas, the Middle East, Africa or Russia.  All great safe places, no danger of your money vanishing there.  Trying to screw your own country out of spite sounds like a great investment strategy now doesn't it?

Nov 15, 2012 12:48PM
Nov 15, 2012 12:36PM
Obama should bail out Hostess. They can make a new cake in honor of the bail out. The Obama Twinikie. But make it a choclate sponge cake, leave out the cream filling, instead fill it with Hot Air.
Nov 15, 2012 12:29PM
Hostess needs to liquidate ASAP as the first in a long line of object lessons for unions that still believe a group of people with money get together in a room and all say "WE HAVE SOME MONEY TO INVEST, HOW CAN WE USE OUR SAVINGS FOR OUR FUTURE .................... WORK FOR THE UNION EMPLOYEES"!
Nov 15, 2012 12:25PM


"That means every time someone comes on television you can expect the market to go down."


Excellent observation.  We talked about this regarding the news releases out of Europe.  It turned into a joke.  Foreign finance ministers couldn't wait to get on TV and say something, anything.  They really got off on it.  And it acted on the markets like a light switch.  On, off, on, off.  Now, they're fighting in Washington for TV time or a reporter with a pencil in his hand.


These are our leaders.



Nov 15, 2012 12:24PM
Cramer accepts mediocrity and incompetence as if it is a virtue.  We have the Greek model and we should begin learning Chinese because the movement dubbed recovery is a myth. Obama's dream of decay lives on.
Nov 15, 2012 12:22PM
The budget jam will not wreck the recovery Cramer ! The recovery is already WRECKED and OFF THE CLIFF ! Thanks to government intervention to save the Criminal Banking Cartel and the FED and their endless printing of worthless money to save the BANKS=SCREW THE AMERICAN PEOPLE !
Nov 15, 2012 12:21PM
mirage gal .....guess what .....

Four more years !!!

Nov 15, 2012 12:20PM
.....and Obama HAS NO PLAN or clue how to straighten this mess out other than print money and blame Bush
Your right!
Obama should blame the "job creators".
These are the people who we're constantly having to bail out and prop up. And what do we get in return? EXCUSES
Nov 15, 2012 12:19PM
our only recovery was called Hope and change, then it was Forward, well here we go off the cliff- Romney would have given our economy some direction if nothing else, now we have a president who has made it perfectly clear he is coming after those who have money- which means 1 million small companies will feel it- look for unemployment to rise along w/our deficit- the Chicago Cowboy is riding the range
Nov 15, 2012 12:18PM
Those who voted for Obama.........as the stock market tanks, just remember one thing: THIS IS WHAT YOU VOTED FOR!!!! BYE-BYE retirement savings.

Oh yeah, you also voted for: $6 gasoline in two years, 50% increase in electricity prices in 4 years, $20 Trillion in national debt, more expensive medical insurance and less service from your physicians/hospitals, more multi-billion dollar giveaways to failing "green" energy companies, more poverty, more food stamps, more welfare cheats, more indoctrination (versus education) in the public schools, foreign energy dependence, etc.

Just remember, those of you who voted for Obama.  Of course, you'll blame Bush or someone else other than the empty suit you worship.

Nov 15, 2012 12:12PM
OK Libs, you got what you wanted, unfortunately WE ALL have to live with it. Let's see, 47+ million now in poverty, that's 16% people,the DOW continues to go down...rapidly. Obama says he has a "mandate" to tax the "rich"......funny how his "mandate " to increase taxes comes from people that PAY NO TAXES. We are on the fiscal cliff, Israel and Hamas are going at it, Obama care is getting ready to hit private business.....and Obama HAS NO PLAN or clue how to straighten this mess out other than print money and blame Bush....welcome to the new "normal"...and thanks to all you clueless Liberals.

Nov 15, 2012 12:05PM

MG! (MisGuided)

Hey, I sure hope you signed that petition to succeed from the the Union!

I signed one too!

But mine was the one requesting that everone who signed those petitions be deported.


Let's see now....Texas succeeds or the petitioners get deported.... Sounds like a win - win to me.

Nov 15, 2012 11:50AM
there never were any jobs created smoke and mirrors
You're right!... But why?
Even after all the bail outs, tax breaks, stimulus checks, NAFTA and glass stegal, the "job creators" FAILED to create any jobs. 
They said that's all they needed to turn things around.
The "job creators" need to be sued for breech of contract or prosecuted for fraud.
Nov 15, 2012 11:47AM
Gee, we have tried Borrowing and Spending our way out of debt....  Now are going to try to tax our way to prosperity...

The imbecile Obama is going to cause a depression.   He will stick to his socialist dogma till the end.

I see unemployment skyrocketed.  The media is blaming Sandy, but the real increases in claims didn't come from the east coast....

Keep taking money from the private sector to grow government and reward your special interest groups.  But when the depression hits, we told you so...

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