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

Thestreet logo

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 1:57PM
The big bankers win again, with the lowly consumers (formerly known as "citizens") afraid to spend money in anticipation of looming inflation (buy groceries or gas lately?) which is predictable by infusion of massive amounts of newly-printed money in the indefinite QE3 Program by the Federal Reserve Bank.  Between the international bankers and the perpetual wars anticipated far into the future, the "Looming Fiscal Cliff" threat means almost nothing -
Nov 15, 2012 1:54PM
When has taxing business ever created jobs.
Giving businesses all those BAIL OUTS, ENTITLEMENTS and TAX EXEMPTIONS didn't create any jobs either. You "said" that's all you needed to get the economy going again......
Sorry but I expect a return on my investment too!!!
PRODUCE OR BE FIRED! (isn't that what you tell your employees?)
Nov 15, 2012 1:52PM
A. I think any ethnicity could see through Romney and voted on Obama's character. that said, there is no character among GOP so that's why they endorsed a guy who never qualified to run in the first place.

B. China elects a new leader and he isn't a strong arm military guy. He's intelligent and cooperative for stabilizing BOTH economies. We absolutely have the correct guy in the Oval Office for that!

Nov 15, 2012 1:47PM
When has taxing business ever created jobs.  Obama is clueless on how to create jobs or he is out to destroy  America!
Nov 15, 2012 1:44PM
So, is the GOP good at being a 'sore loser' ...or what?

WASHINGTON (AP) - Republican presidential nominee Mitt Romney is telling top donors that President Barack Obama won re-election because of the "gifts" he had already provided to blacks, Hispanics and young voters and because of the president's effort to paint Romney as anti-immigrant.

"The president's campaign, if you will, focused on giving targeted groups a big gift," Romney said in a call to donors on Wednesday. "He made a big effort on small things."

Romney said his campaign, in contrast, had been about "big issues for the whole country." He said he faced problems as a candidate because he was "getting beat up" by the Obama campaign and that the debates allowed him to come back.

In the call, Romney didn't acknowledge any major missteps, such as his "47 percent" remarks widely viewed as denigrating nearly half of Americans, his lack of support for the auto bailout, his call for illegal immigrants to "self-deport," or his change in position on abortion, gun control and other issues. He also didn't address the success or failure of the campaign's strategy of focusing on the economy in the face of some improvement in employment and economic growth during the months leading up to Election Day.

Hey Folks....dont forget to add in that little part about how (during the final debates) RoMoney

would do exactly what Obama had done, but would have added  "Pretty please with sugar on top" to it, is all.   HA HA HA HA HA ....When Leno actually ever retires, I say we give RoMoney the Tonight Show to showcase his comedy 'routines'....

Well, nuff said...its off to make a profit for today and ladies and gentlemen, we wont be doing it by hanging out here too long.

PS....and yes, Cramer may be a big putz but sometimes he is Right.

Nov 15, 2012 1:37PM

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Nov 15, 2012 1:37PM
Welcome to the real Obama, now that he doesn't have to worry about re-election the arrogant socialist side reveals itself. He will drive us off the fiscal cliff because that's exactly what he wants, higher taxes and dramatic cuts to the military. I also find it interesting that nbc fails to mention the dramatic increase in the weekly unemployment claims, what a surprise right after the election, this guy makes Nixon look honest.
Nov 15, 2012 1:37PM

This is for all the liberals out there that love Clinton

Fannie Mae Eases Credit To Aid Mortgage Lending

Published: September 30, 1999




In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

Nov 15, 2012 1:32PM
OBAMAGEDON will replace the Great Depression of the last 6 years with something FAR worse ,something Everyone will fear for years to come  
Nov 15, 2012 1:30PM
WOW...you read these posts and you just want to go out and shoot yourself.  It's gloom and doom for the posters today.  You people need to take a chill pill.  I'm not quite sure who all these posters today are.  I look around my world (my middle class world) and I see a lot of prosperity.  If you have the proper education, if you have the type of jobs that are in demand, if you take care of your finances properly ( large or small) then you wouldn't be on these boards whining.  You people that complain about the government handouts are the same people that sit back and complain that this new president is not the one that's GONNA HELP YOU!  If you'd help your freaking selves you wouldn't have to worry about a president taking away your livlihood, or more accurately, "providing for your livlihood" !
Nov 15, 2012 1:23PM

Our once Great Nation is a mere shadow of its former self. We are being stipped of our core values and told that the goverment knows what is best for us. The very things which made this country great are now the things which people are being told are the problems. Be successful today and you are guilty of making a living at someone elses expense. While this is plain as day to me, out there as I write there are masses, some reading this who buy into this socialist idea of "shared Wealth" or common good. I for one will not drink the kool aid. I will not forget how is was. We have become a nation of Fools running head long into destruction at the cost of our Liberity and Freedom.


P.S. Jimmy thanks for the platform. Personally I view you as a entertainer. I mean if you actually were as smart as some people believe, you would be screaming at the top of your lungs how the current fiscal practices and debt are destroying our system. Here let me fill your cup up again.

Nov 15, 2012 1:18PM
It matters very little who is at the head of Government as the goal of most those in Washington is usually to enrich themselves personally as much as possible.
Nov 15, 2012 1:16PM

Fred523   ... True the depression / recession never began yet !

Instead of investing the only way the economy will improve is when people start " saving " !

When people have money..and are stable . be it they have money  under their mattress or otherwise. The entire country is stronger !

Nov 15, 2012 1:16PM
O.k., so here's my plan to help some of us people in the middle class. I would let every American who has put in ten or more years of social security and/or unemployment benefits have the ability to take a one time withdrawal from their benifit now with a flat tax rate of five percent (to the government) to use for their own personal use. This solves a few issues. First: Money is flushed into the economy without having to print more at a higher rate of debt. Second: The government doesn't have to worry about rising benifit costs down the road if you already withdrew. Third: The Gov. has instant tax revenue to use to close the debt gap. fourth: No new tax is created to burden the middle class. Fifth: Monies extracted from those benifits can be used by the benifactor to close their own debt gap. Sixth: The stock market will go up due to the economic advantage. I know that i would rather use my SSI benifit NOW rather than go to a bank for a loan to be more in debt, than wait to die and never get a check from a benifit that doesn't benifit me.
Nov 15, 2012 1:15PM

The main reason the stock market is down so much is the constant hyping of the "fiscal cliff" that CNBC has done for the past year.  How can you blame the president who offered a settlement to this crisis last summer and was turned down?  I hoped you could stand aside from the political barrage that CNBC usually raves and be logical and non-partisan in your evaluation.  Alas you couldn't overcome the fear in CNBC that you all might have to lose a few bucks of income.

Nov 15, 2012 1:11PM
Republican investigation committee finds Jon Corzine MF Global guilty of stealing 1.4 billion from investors segregated accounts ! Democrats refuse to hold their own Jon Corzine accountable as he is ABOVE THE LAW !  We the people spit on the sidewalk and are arrested and spend 6 months in county jail ?   AND JUSTICE FOR ALL or is it just for "them" and not US ?
Nov 15, 2012 1:03PM
   I think that is quite a good analysis, except I have limit sell orders in on even safe haven stocks like Coca-Cola and General Mills. If the Obama tax increases are stopped the money can go back into US companies.
Nov 15, 2012 1:02PM
It seems Republicans in Congress would rather have tax hikes through sequestration than voting for them (thanks to little Grover N's pledge).

So, they would rather hold the middle class tax rates hostage in order to protect the tax cuts for the wealthy.

Nov 15, 2012 12:58PM
Obama added 5 more trillions dollars to the national debt which is now over 16 trillion and your great grandchildren won't put a dent in this if they can find a job.
Nov 15, 2012 12:57PM
lol 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.
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

125 rated 1
264 rated 2
485 rated 3
679 rated 4
640 rated 5
617 rated 6
632 rated 7
493 rated 8
276 rated 9
153 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.