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tv   Mad Money  CNBC  March 26, 2010 6:00pm-7:00pm EDT

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i'm jim cramer, and welcome to my world. >> you need to get in the game! >> firms are going to go out of business, and he's nuts! they're nuts! they know nothing! >> i always like to say there's a bull market somewhere. >> "mad money." you can't afford to miss it. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends. i'm trying to make you money. my job is not just to entertain but to educate. so call me. 1-800-743-cnbc. if you want to be a great investor or just a decent one, you can never afford to stop learning. there's always something new to find out, some fresh
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misconception to correct, and always old ideas that need to be thrown away as times change and they become obsolete. even a grizzled veteran like me doesn't know everything about stocks, much as i hate to admit it. unless you stay on your toes and keep learning, the market will run circles around you. that's why tonight i'm devoting the show to a set of rules and lessons that are vital to protecting you and your wealth. from who? from your own instincts. from yourself. from the constant drumbeat of misdirection and misinformation you'll encounter in the media and from plain old ignorance, which often can be the most dangerous threat of all. so what do you need to know?
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why don't we start with a rule that should be obvious to everyone, but for a variety of reasons is constantly ignored or overlooked? and this one is, and i tire of it, but i will talk about it, because it's probably new. a bear market rally is still a rally! ♪ hallelujah see, there's a widespread, incredibly pernicious idea that if a rally happens in a so-called bear market then it's not worth profiting from. you'll hear this so-called dilemma whenever stocks are going higher as people in the press question whether the rally is real or if it's just a bear market rally. which for some reason i can't understand is considered not real. bear market rally, so it's not real. see, the entire premise, the whole debate over rally versus bear market rally, is extremely dangerous to your wealth if you
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let yourself buy into it. why? because it encourages you to stay on the sidelines in spite of the fact that you think stocks are heading higher. think about it like this. what are you supposed to do differently depending upon which kind of rally it is? if the rally is genuine, i assume that means you should go out and aggressively buy stocks. how about if it's actually just a rally in a bear market? how does that change your game plan? now, all the talking heads and business writers who make hay about the differences between real rallies and bear market rallies are pretty clear. they're clear on the idea that you should steer clear of a rally that's definitively in a bear market. it's self-evident, isn't it? a bear market rally isn't real. it won't last. it doesn't mean the market or the economy are on the end. it's just a way to trick gullible investors into buying stocks at the wrong time like
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they're somehow out of season or something. this is total nonsense. here's the thing. as an investor your goal is to make money. so why the heck should you care about any of these things that make a bear market rally worse than a real rally? this kind of rally is the same as this kind of rally. oh, yeah, you hear it won't last? hey, have you -- you have to sell in order to book your profits anyway, right? and besides, you could say the same thing about every broad-based market-wide rally that's taken place since the year 2000. as we eventually gave up all those gains. so that whole rally could be a bear market rally, right? what about the argument that a rally in a bear market doesn't mean he either the economy or the underlying companies are truly improving? again so, what? how does it relate? relate in any way to whether you should try to take advantage of the facts that lots of stocks
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are going higher. what are we left with? a guarantee that your bank will happily take money made during a bear market, even in a dreaded bear market rally. but the bank manager might be able to tell the difference. he's going to secretly judge you for making money in a bear market rally? uh-uh. can't put this in the atm. can you really afford to spurn a rally just because it's happening in a so-called bear market? do you know that after the market bottomed in early march of 2009 the dow rallied 36% in the following three months. were those points of up side not worth harvesting? the whole teemime i heard it wa bear market rally. i have to ask-f those points aren't worth harvest, which ones are? do not be misled by the animal metaphor either. yes, there are harder and easier markets to make money in. but you can't just use animal symbols to guide your investing decisions. and i am about as fond of animal symbols as it gets.
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look. but if for some reason you think it's critical to have very set definitions of bull and bear markets, then at a certain point a large enough rally will turn into a bear -- turn a bear into a bull. nowish here's something that i've been thinking about since the march bottom. here's something i think about all the time. is there a special line where a bear market rally that supposedly isn't worth your time turns into a real rally that is a sort of pinocchio moment? it's fine to bet against stocks when you think they're on a downward trajectory. it's smart to sit on the sidelines when you believe the market's going lower. but it's the height of foolishness to voluntarily opt out of a big move higher you that see coming for no better reason than it's happening in a bear market. the bottom line? i've never seen a rally that caused people who own stocks to
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lose money. so don't be scared away by the bear market rally canard. jerry in california. jerry. >> caller: yeah. southern california boo-yah to you, jim. >> southland boo-yah back at you. >> caller: hey, i noticed in the stock market recently it seems look sometimes a stock will get a good -- good news and it will get a nice pop and it will go up and then the stock just goes sideways for the rest of the day, it only goes up or down a few cents one way or the other. is this some computerized trading program somewhere? >> well, you know, a lot of it is that a stock may go up and be really bought up by a couple of large institutions that then decide, you know, what we're not going to take it any higher but we're going to -- this is what's called taking and bidding. they take and bid they take and bid, and then after they've moved it up they sit there on the bid side and bet that you'll take profits and hit them. taking and bidding is a very informed way to do things if you have to build a large position. i often at my hedge fund, where
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i was running half a billion dollars, took and bid, took and bid to a level that i wanted, and then people hit me and i built my position. that's what's going on. i want to go to mike in new york. mike. >> caller: boo-yah to you, jim. >> boo-yah, mike. >> caller: cramer, i need your help with a tough decision. >> all right. >> caller: so i was lucky enough to sell my apartment back in early 2008 and stayed in cash for the rest of last year. >> nice. >> caller: considering where the market has gone, the question is over the next three to five years which is potentially a better return on my investment, buying in a distressed housing market or continuing to rent and putting more of it to use in the s&p or a portfolio of undervalued stocks? >> well, i have to tell you that i think the coming boom in real estate is still not going to produce the kind of return that you will get from owning high-quality stocks with good yields where you continue to reinvest, to get more stock and then get more dividends. i think real estate's going to return to its historical 2% to 3% growth per year. i think stocks could be headed
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much higher. a rally's a rally. so don't be scared away when it happens in a so-called bear market. stay with cramer. natural gas is a cleaner burning fuel,
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for the better part of a century the united states was the preeminent global economic superpower. as an investor that meant you couldn't go wrong betting that when america sneezed the rest of the world would get pneumonia, if not the bubonic plague. the rest of the world's economies were often more dependent on the federal reserve's decisions than their own central banks'. in short, we were the glorious center of the universe, and you had to invest accordingly. all of that has now changed. we're no longer the center of the universe. and if you don't acknowledge the change, you'll get burned over and over again. we've been displaced. we've been displaced by communist china. home to the best capitalists in the world. and this is just the beginning.
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china is now far more important to the global economy and therefore many parts of the american economy, not to mention our stock and bond markets. and that's what's happening inside the u.s. it's a simple fact of life. you've got to start owning this. no one wants to say it because it's depressing. but you've got to get used to it. i don't care if it's depressing. i'm not out here to make you feel better. i'm out here to try to make you money. until you acknowledge the supremacy of china, there's no way you can make sense of this market anymore. it will seem even more crazy and he senseless than it was when i wrote "jim cramer's real money: sane investing in an insane world," still in paperback. look at the facts. the american government issues trillions of dollars in debt every year, and only the chinese, with a national balance sheet that's brimming with capital, really had the capacity to buy everything we issue. as our banks teetered on the precipice or went under during the financial crisis, theirs were never in trouble. as a matter of fact, the only trouble may come from the fact that they were told to loan more
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than they should when the economy went down. it was chinese demand, particularly for natural resources, that powered much of the bull market that peaked at the end of 2007, when our housing bust and incipient financial crisis started dragging the market down like a lead weight to a man out the window. but even as we careen toward banking armageddon -- >> the house of pain. >> -- the strength of china supported many of our industrial manufacturers and infrastructure companies. look, everyone knows that the failure of lehman brothers on september 15th of 2008, a date that will live in financial infamy, hit our economy and our stock market like a wrecking ball and -- >> they know nothing! >> but the fallout for chinese demand for just about everything at the same time helped push us into the brief garden variety depression that lasted until the beginning of march of 2009. and make no mistake.
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it was in large part a chinese recovery that helped pull us out of our brief depression and back into a recession. the chinese stock market turned well before ours did, rallying to double-digit advances while we were still hurtling to double-digit declines. and the indicator that best predict our recovery was the federal reserve, their inflation data? was it the labor department's employment data? no. it was the obscure baltic dry freight index. this is the one that you would have followed and nailed the bottom. the baltic freight index is a measure of worldwide shipping rates for the freighters that carry coal, grain, and iron ore. hey, the stuff that china needs, right? it turns into almost a direct measure of what the chinese are buying. in our own stock market, china controls as much or more than we do. machinery companies. don't look at america first. it's china that matters most to joy global or bucyrus or even a
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big household name that's a dow stock, caterpillar. the coal and steel industry r industries, china again. the land of mao is more in charge of a nucor or a u.s. steel than the land of lincoln. raw materials, please. china's way more important than anyone else when it comes to copper, fertilizer, and especially oil. i think don't pay more than 79 for oil. >> even our railroads are dependent on communist china because their business is all about moving the goods china wants to the coast where they can be shipped. and this china sinned roechl's not isolated to the kind of goods you expect a developing country to buy. no. china's capable of taking the wheel when it comes to a whole host of technology stocks. hewlett-packard. as we see when their government poured 40 billion into a wireless infrastructure stimulus package, qualcomm. why? china's population accounts for
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about a quarter of humanity. that's a lot of people. and it's got a real growth economy. that would be enough. but china also has a political system that's far more capable of producing results than our government. it's a command economy. a recession in america cause our political leaders to get voted out of office and you know they must be sad about that. in china economy goes bad, political executions. i think that's a strong incentive to get things right, perhaps on a massive scale. oh, man, that'll bring the gdp up. the bottom line, it's time to face facts. the people's republic of china and not the u.s. is the most important capitalist country on earth. stay with cramer.
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i know you're sitting down. you should be sitting down. because you are about to hear something that is heretical. you can make more money
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following the least informed, most amateurish investors than you can by trying to follow the so-called smart money. this is a rule for me. we're doing a lot of rules tonight. this one's a wild one. that's right. the people who know nothing can help you make bigger profits than the most successful, sophisticated money managers. >> they know nothing! >> listen to them. don't get me wrong. i think it's important to learn from the success of others. but there's no good formula for mimicking the moves of the big boys unless you're piggybacking on the works of activist investors who force poorly run companies to shape up. but i've got a great formula for making money off what you know about the herd. i'm talking about some quick easy gains if you do it right. got your attention? secrecy the amount of money in the market coming from investors who either don't care that much or simply haven't been taught how to manage their money well
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is staggering and it's not hard to predict the general direction where they're sending it. for example, when we're in a bull market and stocks have been going higher for a while, tons of people will pour their money into mutual funds, and those funds then turn around and put most of the new cash to work. they tend to put it to work on mondays because they get it over the weekend. back at my old hedge fund we used to call it mutual fund monday because thanks to the influx of new money over the weekend the markets seem to levitate week after week, going up for no apparent reason. if you didn't know what was happening behind the scenes. having been an institutional broker and a money manager, i get it. it doesn't get much more predictable than what they do. with a little more effort, we can gain which funds they'll favor and even the stocks that those funds will then buy. whenever one diversified mutual fund that invests in stocks is beating the stuffing out of all the others over a short period of time, think over the last quarter or even the last month, then the person running that
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fund will always get gobs of money coming from people who are trying to chase the hottest hand, the hottest mutual fund. and you can find that information all over the web. now, if that mutual fund is large enough, you've just got yourself a shopping list. and almost no mutual funds close. they're always happy to take money in. now, it's not every fund that i want you to follow. it needs to be managing at least upwards of 50 billion because with that much money there's no way a mutual fund or a family can buy a meaningful amount of stock without giving a nice boost higher. anticipating those purchases is a great and effective way to quickly make money. look up the fund's largest holdings. especially the ones that it bought more of recently. you can do it on the web. if you see any stocks where you also like the fundamentals of the company, those are the stocks to buy. how do i know this? in their own way mutual fund managers are just as predictable as the investors who change hot funds. in some ways they're more
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predictable. whenever a fund manager gets a huge influx of cash most of the time he'll use that money to buy more of the stocks he already likes. he'll take his biggest positions and make them even bigger. these guys tend not to buy different. they just buy more. they stay true to their investing style and their beliefs. and that's what they're afraid of. they don't want to stray. which makes it easy for you to spot the stocks they'll likely move with their buying. i know this sounds like circular reasoning. you should like the stock because it's going up, because the mutual funds that own it are taking in money and putting it to work in these stocks. but sometimes you just don't want to overthink it. this one has been battle-tested time after time. and i've got to tell you, it has always come up aces for me. one caveat. be sure to monitor these trends quarter to quarter. the moment one of these funds has a bad three morksz tnths, t money will come pouring out and so will your trades' profits. in fact, at my old hedge fund i would short the very stocks of the managers who were behind the
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market. here's the bottom line. following the smart money, those guys are wrong halftime time. you're better off following and anticipating the horde of investors who chase hot mutual funds, a source of quick and easy gains over and over again as long as you know where they're going. greg in maryland. greg. >> caller: jim, yeah, man, just want to give you a nice old annapolis, maryland blue crab boo-yah sending up to you. >> now i'm hungry and i want to go to a navy game. what's on your mind? >> caller: you've got to get down here, have some crabs with us sometime, man. they're pretty good this year. >> i'd love to. >> caller: anyway, my big question was i know in your book "real money" you talk about gdp cycle as it pertains to cyclicals and things like that. i'm just wondering where you think we are in that chart. >> i did revise it. i had to revise it because it did not include brazil, russia, india, china. and i revised it in this one.
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i advised it in "jim cramer's mad money." and where i would tell you is where we are is about to turn up. we are literally in the cycle. and i'll just flash it in the book. we're right here, about to turn up. and if you saw, it you would say that we're at the bottom right-hand portion of the letter u. that's where we are. carrie in florida. carrie. >> caller: hey. up 60% boo-yah, jim. >> nice. nice boo-yah. nice sunshine boo-yah. >> caller: thanks for getting me in the game. >> i appreciate that you're in the game. it's vital. because this is the only game. your paycheck's not going to get you. you've got to be in this one and you've got to stay in it, which is why we have a lot of rules. what's up? >> caller: being an entrepreneur, i'm always looking for a game-changing developmental product to come from developmenta state companies. these stocks need a little extra scrutiny before they come into the spec side of my portfolio. >> right. >> caller: i generally hold these products up to the light of new market trends such as
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wireless mobile tsunami or green energy. i look for other indicators such as production development contract with china. >> okay. >> caller: what other examination techniques or tests should i use for these stocks? the spec plays under -- >> i have to tell you, sales, sales, and then sales. i do not care about earnings at that stage of the game. i care about organic sales. i care about a customer need being met. and i care about the size of the overall market. earnings are unimportant to me at that stage of the game. sales and what's known as the addressable market. if both are big, i think you have a winner. all right. following smart money isn't always the method to investing. trying to game the herd and have them stampede stocks higher, i think points you in the right direction. stick with cramer!
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welcome back to this how to adapt to try to make money in a changing market edition of "mad money". if there's one thing you can be sure of as an investor, it's that things change, you've got to be flexible. do you know that often the most important things when it comes to picking stocks and figure out which direction the market's headed change constantly. particularly in this new world. you've got to be ready. one of the most important lessons that i think you have to learn from the market's collapse in late 2008, early 2009 followed by the meteoric rise after the bottom in march of 2009 is that the indicators that
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matter can change in a heartbeat. so you should never stop trying to figure out which ones matter most. what do i mean by indicators? okay. we've got a bunch of them. there's all kinds of technical and fundamental information that we use to inform our worldview about the economy and the market. and you know if you don't have a worldview you're not going to bible to invest well. you always need a sense of where things are and where they're headed based on the available facts at any given time. i'm talking about interest rates, unemployment, oil prices, gross domestic product growth. or you may look at some of the technical indicators, the volatility index, or one of my absolute favorites, the oscillator. i use the s&p's. which tells you how overbought or oversold the market is, whether there's too much buy pressure or too much sell pressure, people are selling too quickly, or buying too quickly. that's a handful. unfortunately, you can't just figure out which indicators are the most important and then always look at them when you're
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trying to divine the market's future. it no longer works that way. this is as much now an art as a science. the most it's ever been since i've been trading. which is 1979. there are always new indicators popping up that you never cared about. and the old wins outlive their usefulness faster than ever before, even though people cling to them like tote elms. at least in the way you're used to extrapolating them. learning how to construct your worldview when it comes to the market is like learning to fly a plane. over and over and over again. it's not like being a pilot, where your instrument panel with all the indicators you rely on, always in the same place, meaning the same things. no. in fact, it's just the opposite. every time you go up and try to come one a fresh view of the direction of the economy and the market, you've got to learn to fly all over again. because the indicators you're using, the various pieces of information with some kind of predictive value, won't always 2e8 you the same thing twice. sometimes they'll stop telling
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you anything useful at all. but unless you know what i'm talking about and subscribe to this rule, you'll just think it's same old same old. some will be more important. some will be less important. you've got to try to keep a handle on which ones are becoming more or less relevant and try to know why you've got to be flexible. despite the desire by some analysts and portfolio managers, especially the technicians who love to analyze charts, we can never put our portfolios on auto pilot. so how do you make sure that the indicators you're using are still doing what you think they do? now, listen. here's what's happened. you're thinking about what's going to happen after you see the indicator and it's not happening anymore. we only use something as an indicator in the first place if we think there's a decent correlation between the indicator and something we think is worth measuring. all right. so it's historically gold. okay? this was always, for 30 years, one of my key indicators. it was always about how frightened investors are. it's about economic instability.
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it's also about a predictor of inflation. when we're scared, we buy gold because it represents safety, especially since gold prices tend to increase when everything else goes down. and i've got to tell you, for years at my old hedge fund gold prices were a fantastic indicator of the level of fear in the market, chaos. but you know what? none of this is true anymore. oh, it's got a little bit of a tinge, but over the years since i've retired gold gradually stopped being a good stand-in for terror and eventually reached a point where a move higher hardly told you anything at all. we've had tremendous deflation, and gold's gone higher. what changed? what changed was an actual physical demand for the gold, more demand from newly developed nations. you start making more money, start buying more jewelry. more investors buying gold to hedge investments in the mighty dollar. whole countries, as soon as they get money they buy gold. more commodity hedge funds trying to invest in gold as an asset class all by itself. pension funds too. they're viewing gold as like
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real estate or bonds. then there are etfs that are buying the bullion up directly. a move in gold could be caused by any of these things, and that means gold is no longer a reliable indicator of anything. not of fear, not of stress or other asset -- it's just not good. now, it's still a good investment as insurance because it does go up when we get hit with a bout of inflation or economic chaos. but it's not a predictor of those. it doesn't mean that those are the causes every time it goes up. if you're trying to determine which direction the stock market is heading, then gold is far more likely to confuse you, as it did all of the beginning of 2009 than it is to impart anything close to useful information. anyone who watched gold's run-up in 2009 made the mistake of thinking it was an important sign, would have been selling, would have been shorting, would have been dumping, would have gone into cash precisely when the opposite was called for, at the bottom in early march, when we were dow 6,500.
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you would have missed a huge move in stocks because the rules didn't apply anymore. the old rules that followed gold took you to an illogical conclusion. that's not different from a pilot flying through heavy fog who relies on the instruments to maneuver, only to discover that someone replaced the altimeter with a random number generator and almost crashes into the ground. except that investors who took the wrong cue from gold have no excuse for relying on an indicator that hasn't worked now in multiple years. how about some new indicators that are working? okay. china becomes a global economic superpower. i mentioned this. i've already explained. chinese communists have replaced us as the economic top dog. you've got to pay attention to shipping. you've got to know what they're buying. the baltic dry freight index. that tracks shipping around the world. i regard it as a stand-in better than the chinese stock market, which often seems manipulated. it's a better stand-in because anything that can be carried in a dry bulk ship like iron ore or coal or grain is probably ending
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up going to china. how important did this one indicator become? and this has been around for years. i used to follow it in the '80s. in march of 2009 the bottom wasn't reached by looking at the chinese stock market. it was called by the baltic dry freight index. once in a generation bottom, as my friend doug kass would say. it turned and rallied well ahead of the bottom in our stock market. and if you knew to look for something that would measure chinese trade with the rest of the world, this was the index. it gave you a great edge, even better than tracking that stock market. you probably never heard of the baltic dry index before a few years ago. i guarantee you we'll all be paying very close attention to this index for years and years and years to come because it's really the best way to track imports to china, which is therefore the best way to track world trade. even if you didn't pick up on your -- the importance yourself, you've got to be flexible enough to realize that just because something is unfamiliar doesn't mean it won't become significant. i have many friends who refused to pay attention to this index
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because they had never paid attention before. myriad other indices flitted in and out of contention. the vix, an index that measures volatility. people stuck with that way too long. now, that does come into play when the system's stressed, a high reading telling you to be careful. but it stayed high the whole time the market rallied. so that didn't help. on the other hand, if the system isn't stressed people don't even bother with the vix and it comes off the instrument panel. and above all the others, i still favor any index that measures the number of stocks that have gone up versus the number that have gone down. the advance-decline index is the only thing that has worked consistently through the years that i've been involved in investing and trading. it shows the difference between the total number of stocks that are advancing and the number that are declining every day. but unlike the baltic dry freight index, which predicted a return to world trade, and advance-decline tests, unfortunately, and this is why it's not a prognosticatoprognos simply confirms what you already know. the bottom line, look, the moral of the story isn't that you need
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to follow the baltic dry freight index religious lipp from now on. it's the indicators that you might be following now, the ones you followed before, that tell you to let you discern the next big move may not be anywhere near as helpful as you think. and more importantly, as it didfor almost all the big money managers in 2009, it could harm you by sidetracking you from the next big move entirely. the best way to protect yourself? by knowing precisely what the indicator you're following measures and then drawing the connection between what it literally tells us and what that means for the market. scott in florida. scott. >> caller: hey, jim. ba-ba-ba-ba-bah-boo-yah from parish, florida. >> that's a spirited and almost comical stuttering boo-yah. what's up? >> caller: i want to thank you for the wonderful calls you've made recently. especially going back to bank of america when it was trading at $4 -- >> yeah, we got lucky, though. sometimes it's better to be lucky than good. what's up? >> caller: maybe.
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but you really helped my portfolio recover. thank you. my question for you today is about mac b. you mentioned it a few weeks back as a good tool. i incorporate td into what i'm using. i've got it on a chart with accumulation rsi. but i don't know when the refresh rate should be on something like that. at one-minute refresh rate it says one thing. at five-minute refresh rate it says something different. could you tell me the best way to look at that to get an idea? >> see, i have never been that granular with this moving average indicator. i don't want to do minute to minute because i don't want to encourage day trading. i like to look at it over the course of multiweeks. there are other people who would be better answering that question than i do because i shy away from that minute to minute and focus much more on the dailies. know what your indicator measures. draw correlations. but don't be afraid to rip up the indicators, particularly because so many of them are no longer working. stay with cramer.
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tonight as your investing coach someone with three decades of stock experience who isn't trying to sell you anything like
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a broker might be, who doesn't want your money like an investment adviser, don't want the commission, don't want the merge, i want to teach you how to learn. okay. sounds silly. but when you stop trying to learn about the market, you lose your edge and it becomes a whole lot harder to make money or even just trying not to lose it. so my next rule is a lesson i came to very late. something i didn't truly realize the importance of until long after i left my hedge fund and started this show. i was probably too cloistered, too professional. the rule is listen to everyone, not just the stock experts. because they might be able to teach you something useful. don't just write this idea off. i know how hard it is to accept that non-experts in stocks and in businesses might know anything of value. as someone who prides myself on a skill at analyzing securities
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and my understanding of what stocks should trade higher on the fundamentals, the facts about the business, i know i'm too closed-minded toward people who know businesses but not the stocks that allegedly trade in sync with them. i can't tell you how many times i've had a chief executive office error from a big cyclical business, something that needs a strong economy to do well, machine manufacturer, home builder, clothier, come on the show, come on "mad money," and start talking about how things are going great guns at his company. and i've had to burst the poor guy's bubble, telling him right back, enjoy it while it lasts, partner, because the cycle's coming and it's going to be a grim reaper. >> the house of pain. >> now, i never know the business better than the ceo. i'm never going to. i'm in the business of tv now. but i always know the stock better than he or she does. and when a stock is rolling over while the ceo is crowing, i know
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that business is about to fall off a cliff. >> the house of pain. >> stocks are pretty good indicators of the future, and they tend not to lie. while even the most honest ceos never tend to be bearish enough. it's a pretty toxic stew for those you take your cue from when the bosses say it on tv instead of the market's almost always brilliant action. i bow to the market's action. it's humbling. other times an executive from a soft goods company, a consumer staple, the kind of stock that fends to do well in a recession but do little when the economy's improving or even go down, will express amazement that his stock isn't flying higher after a better than expected quarter, forcing me to educate him about the facts of stock investing, that his company's very nature, it's building consistency, will be working against him as the economy's heating up and he couldn't deliver an explosive up side surprise based on stronger
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sales, just a manufactured one from a small price hike here and there, tiny layoffs, some buybacks. when the world's getting better, nobody cares to own a food or drug company that beats their numbers. there will be other dog has its day companies with truly blow-away earnings that will dwarf anything that even the best soft goods company could ever make versus the estimates. doesn't mean you should dismiss people out of hand when they understand the business side but don't understand the stocks. particularly when it comes to forecasting what the consumer might want. in fact, if you're like me, it means that you just have to work harder to find other people who know more than you do about customer likes and dislikes. this is a really hard concept. because the analysts don't teach it and you may not know it. in the world of stocks those people have knowledge that can have a much more powerful effect on the multiple investors are willing to pay for a company's earnings. you know the basic arithmetic on
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how to arrive at the price a stock needs to trade. you need to figure out what it might earn in the future, right? then determine what investors will pay for those earnings. the price to earnings multiple. and as the name suggests, you multiply the earnings, the estimates, by the p/e multiple to get your price the estimates by the p/e to get your price target. sometimes the exercise is easy. i know what multiples to put on cyclical stocks by looking at previous points in history. you look at the norm during previous points. i know houtmarket tends to value consistent earnings and how it tends to value earnings with fluctuate product cycles like tech stocks. we do that every night on "mad money," but, big but, i have always been confused about what so-called fickle consumer would do whenever i try to project the earnings of companies that sell high-priced goods to the public. i call it a blind spot, maybe it's the blind spot of simple living. unlike the snobs whole miss a
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great restaurant stock like darden. two places no stop will be quite dead in. i have to adjust to the ways of those who politely -- because i am an ambassador of goodwilland a statesman no doubt in the mold of thomas jefferson or no doubt the dalai lama, i will call the nonfrugal the people who pay $400 for true religion jeans a stock that i thought was a great short until i found accelerating demand. rich kids around the world simply couldn't part with their expensive denim pants. i miss that entirely. hey, same thing with aeropostale, the casualty apparel store. this stuff seems expensive, who would pay for that, no. to me it looked like old navy, what in the heck did i know, particularly young discerning people. i missed it. i just didn't think that anyone would spend that stuff. that's why when i read setting the table, a book about hospitality about my favorite
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major by danny myer who owns famous eateries like union square cafe. and the only four-star guy i know when is 11 madison. well i knew i had to have home "mad money," because this guy has the beat. danny didn't know it until i had him on the show but he can divide the multiple of the high-end stocks that give me so much trouble. i always on my show run any high-end multiple any, company where the stuff costs a the love money i always run it by him before i go to the show and recommend something. this man can measure the sauce that explains why someone with a nonfrugal attitude is why you pay one with more experienced. danny gets it. a service that someone like me can't figure out what the fuss is about, just witness my obvious obliviousness about true religion/aeropostale the two hottest apparel stocks of 2008-2009 and i just didn't get it. dane pointed out other companies they thought were overvalued,
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whole food, chipotle, american express. he told me they had developed strong customer relations that i couldn't see by just looking at the earnings, that they were so hospitable to clients that when things got tough those clients stuck with him and did even more business than wall street models would indicate. his model which wasn't a model at, just in judgment, customers would spend more. i will always be a stock guy first. i laughed when i first heard these suggestions from danny meyer but he and i put together an index of the companies that fit the bill, companies like chipotle that mexican restaurant whole food chain or apple, american express. a whole danny meyer hospitality index full of stocks. and pit him against the s&p 500 right in the teeth of the garden variety depression post-lehman brothers, and wouldn't you know it, even though every one of these players cost more to spend than another guy, no value they could see, the outperformance, the amount these stocks beat the average buzz, well it was extraordinary. danny meyer knew what people
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would stay pay for in a downturn. i didn't. he knew the hospitality equivalent of aeropostale and true religion. i didn't. to remind you that you don't want to be a snob about stocks. here's the bottom line. i need you not just to listen to the analysts or the companies. i need you to listen to everyone especially to people who know more about consumery behavior, that's different from your own. otherwise you will miss out on what looks to be some totally pennetrable gains the ones they have seen during the biggest rallies. wouldn't you rather understand them and take advantage of them? i know that i will for now on.
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special rules follow. i like to say there is always a bull market somewhere and i promise to try to find it for you here on "mad money." i'm jim cramer and i will see you tomorrow!


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