Saturday, November 3, 2007

Cramer's Hysterics

Jim Cramer of CNBC, has been really quite good on the market this year. He picked AAPL, GOOG, RIMM and AMZN, before the street went gaga over them. And his "know nothing" speech about the Fed was classic, and also completely right.

He left us this weekend on with this blog entry: Financial Guarantors are Already Dead. Read it, or get a subscription. The site is a must read for those in the market. But I want you to read it, not because it is prescient, but because you need to read what gets written at bottoms in markets. So you can recognize it and make money off of it. Here's just one snippet from the article.

...and you have to answer the question "Can the Financial Guaranty Industry Survive?" with "Are you out of your mind? IT'S ALREADY DEAD."

Does anybody remember when Merck had the Vioxx litigation? Here below is what Cramer had to say about that. It may have appeared to be reasonable, intellectual and lucid. But it was also completely wrong. And it happened at the bottom in Merck. And then, as now, Cramer was saying these individuals, who were defending their companies didn't know what they were talking about.

Close your eyes and ears to the Merck sirens, because they don’t know what they are talking about. They are na├»ve. All of them. Because they don’t recognize that with the Vioxx debacle, Merck, overnight, has become the trial lawyers’ next big score, the next big bankruptable company out there. The Merck lovers don’t understand the vast powers of the mass-tort bar. They underestimate the power of the American judicial system to wipe out companies, innocent or guilty, for fatal mistakes. They don’t get that the plaintiffs have all the cards in these lawsuits and management has none. In fact, if I were the New York Stock Exchange, I would put a big skull-and-bones warning label on Merck’s stock that would say: “Warning—the security you are purchasing may end up worthless to you. All Merck stock bought after the recall of Vioxx might soon belong to those class-action plaintiffs who used Vioxx after the time when Merck knew that Vioxx may be lethal.”

You can’t blame management for putting on a good face. Gilmartin doesn’t want to frighten people or give ammo to his enemies. But, from the time I helped start American Lawyer more than 25 years ago, I have made a career of tracking—and betting with—the mass-tort bar. I have studied how it has bankrupted whole industries, taking down company after company, including those with only the most tangential exposure to, say, silicone breast implants or the making of asbestos. These guys are the masters of their domain; you can’t beat them. Now that the communist movement has dwindled to a handful of ne’er-do-well countries like Cuba and North Korea, the mass-tort bar has replaced Marxism as the most powerful countervailing force to capitalism worldwide. And until Merck came along with this Vioxx recall, they were just about out of deep-pocketed targets to bankrupt, having just finished off the makers, handlers, and insurance companies that represented anything having to do with asbestos.

I can tell you that without a doubt, Merck will be lucky to come out of this Vioxx nightmare as a stand-alone company, and will far more likely be reduced to a trust for abused patients and nothing more. In fact, the only thing that could save Merck is that some of the more jackal-like members of the tort bar could get distracted by the possibility of multi-billon-dollar suits against Marsh Inc. and other insurers and insurance brokers, courtesy of the spadework produced last week by New York attorney general Eliot Spitzer, and not pursue Merck with the abandon I anticipate.

Where is Merck today? It's doubled. How about the financial guaranty industry? Is this risk already priced into these stocks? Do they have a franchise value? If you can't get answer that, then stay away. But let me ask you this.

If the NASDAQ 100 rallies 30% in the next six months, will housing still be in a recession? Will that change the psychology of the homeowner? Is that variable calculated in Cramer's doomsday scenario?

It isn't. And if you short these stocks here, you'll have a headache that vioxx couldn't cure.

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