Friday, April 03, 2009

The Boo-Yah! is Still Intact

Well that didn’t take long.

Was it really just three weeks ago that Mad Money host and former-hedge-fund-manager Jim Cramer promised Jon Stewart he would become the kind of financial commentator that would help protect small investors from the kind of stock manipulation that guys like, uh, Jim Cramer, bragged about doing on a tape that Stewart played for, um, Jim Cramer?

Indeed, it was (see “Boo-Yah! Will Never Be The Same”).

After being hoist with his own petard—thanks to Stewart’s relentless use of video clips featuring Cramer himself lecturing on how to manipulate the market—Cramer gave up and promised to be a force for good, rather than for the kind of manic-depressive, boo-yah trading techniques that made “Mad Money” one of CNBC’s most popular shows.

“I’ll try it. I’ll try it,” Cramer finally blurted out, his head nodding vigorously, like a teenager promising to ease up on the beer-and-shots stuff that you know—and that he knows you know—he’s going to do anyway, as soon as you give him the keys to the car.

Well that was then, and this is now.

We caught a glimpse of “Cramerica” last night, just long enough to watch the host officially declare the end of the Bear Market, and the running of a new bull. What a thousand points on the Dow will do to a reformed stock junky!

Far from offering sober tips on how to invest for the long haul, Cramer was promising to find for his viewers a stock that hadn’t yet participated in the New Bull Market. He was, he said, looking for a “piece of merchandise” that had not yet been snapped up in the recent rally.

Now, that phrase—“piece of merchandise”—pops up frequently in “Confessions of a Street Addict,” Cramer’s excellent book on what it’s like to work at a hedge fund that nearly goes under…and comes back to fight another day.

To traders, stocks are “pieces of merchandise,” the same as anything else you can find at a store. In fact, Cramer said exactly that last night.

He even held up various pieces of damaged clothing to make his point that when shopping for discounted “merchandise,” an investor must distinguish between the cheap-but-worth-buying stuff and the truly damaged goods.

And that’s the problem.

To traders like Cramer—and he is a trader, not an investor—stocks are “pieces of merchandise,” just like shirts, shoes, refrigerators and cars.

But shirts, shoes, refrigerators and cars don’t have the potential to grow in value over months, years and decades, let alone to pay dividends. They don’t have the ability to create wealth, fund college educations or even make somebody a bit of mad money to blow on a new shirt, new shoes, a new refrigerator or a new car.

Pieces of merchandise depreciate the minute you buy them.

Traders don’t get that. Nor do they care. They’re traders. That’s their job. And that’s how they make money: by being dispassionate about whatever it is they’re buying and selling, whether it's a stock or a car or a pair of shoes.

There’s nothing wrong with trading: just don’t confuse it with investing.

When Cramer screams at somebody on a “Lightning Round” to “Sell-Sell-Sell” a “piece of merchandise” that “acts bad,” you’d better understand that he’s thinking like a trader, not an investor. And chances are he’ll be screaming “Buy-Buy-Buy” once that same “piece of merchandise” starts to “acts good.”

So that’s why it is that 20 days and 1,000 Dow points since his whipped-puppy-dog appearance on Jon Stewart, Cramer is back screaming “Buy-Buy-Buy” on whatever piece of merchandise looks good to him at that moment.

Now, what piece of merchandise did Cramer pitch last night? What did he find in the bargain bin that constitutes an overlooked, ready-to-rally idea? Was it a cheap consumer stock that will benefit from a recovering housing sector? A low-priced transportation stock that should do well once businesses start restocking their inventories?

No. It was Celgene.

Celgene happens to be a well-run biotech company that recently guided earnings a bit lower, causing the stock to fall out of bed. It also sells at 30-times trailing EBITDA, in a market in which hundreds of stocks sell for 3-and-4-and-5-times trailing EBITDA.

Bargain bin? Hardly.

So why did Cramer recommend it?

Because, he said, the Celgene story is, quote-unquote, “Still intact.”

And “Still intact” is, for those who never worked on Wall Street, the oldest, lamest, saw in the stock salesman’s book.

Go ahead, try it out on any trader, any money manager, any analyst you can find. They’ll tell you that phrase, “Still intact,” causes the radar of every professional investor to start emitting violent waves of radiation intended to destroy the offending speaker.

They’ll tell you “Still intact” is the last defense of the worst ideas, and that what it really means is this: whoever had the idea in the first place has run out of facts to support the story.

Indeed, they’ll probably tell you that when you get a call from the broker who sold you a stock that has fallen out of bed like Celgene did, and the broker tells you "Our thesis is still intact,” you run—don’t walk—to your computer and “Sell-Sell-Sell.”

It is the death-knell of all stock ideas, a defense reserved for names like Lucent and Nortel and Citigroup and Fannie Mae that will, as FDR said, go down in infamy. For every stock that is off 90% from its high and headed to Chapter 11, somebody, somewhere, is saying “our thesis is still intact.”

Indeed, if you read your history books, we think you’ll find that while Hitler was driving down the Champs Élysées getting the Heil Hitler from his goose-stepping troops, disgraced former Prime Minister Neville Chamberlain, who had thought Hitler a decent, misunderstood chap and thus gave up Czechoslovakia at Munich, was at home telling his cats
“Our thesis is still intact.”

In fact, we’d bet that the Cramer who ran the hedge fund would have thrown whatever salesman came into his office insisting that an idea was “Still intact” out the plate-glass window of his offices—or at least would have slammed his phone into the guy’s head like Joe Pesche does to that cowboy in “Casino.”

Yet the Cramer who three weeks ago promised to protect all those investors Jon Stewart suddenly cares about is now pushing a “piece of merchandise” whose main business—biotechnology—is anything but “intact,” what with Congress and the new administration aiming to make healthcare as unprofitable as possible for the companies that make the stuff.

Somebody, somewhere, did a great job pushing a “piece of merchandise” on Cramer.

Looks like the Boo-Yah! is still intact.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Mark said...


You're being unfair here (not about Cramer, but about your denigration of the phrase "our thesis is still intact"). If the phrase itself rubs you the wrong way due to the nature of the people who typically use it, well, okay, but the concept behind it is one that's followed by every great fundamental investor. When Buffett says he hopes that the prices of his stocks go down so he can buy more of them, isn't he really just saying that "our thesis is still intact"?

s said...

On a tangent re: healthcare, and the impact of health care reform on companies' profits. Should we really weep for the pharmas and the biotechs, who might have to just struggle through life with a 20% EBITDA margin rather than a 30%+ one? Aren't the guys who are really in trouble the providers, where more of the healthcare spending actually flows, and who struggle to earn their cost of capital even now?
Given your oh-so-accurate evisceration of HMA a few years back here would be interested to hear what you think.

Anonymous said...

nicely done Sir. Like Cramer was ever going to stop the madness...

Traders are traders as gamblers are gamblers. Quants will never uderstand that

Jeff Matthews said...

Mark: I'm not talking about "the nature of the people who typically use it."

I'm saying it's a meaningless defense when the defense has no meaning.

And, no, Buffett is not saying "our thesis is still intact." He's saying "I don't care what the market thinks, because I know more than the market."

"Our thesis is still intact" is the best "tell" going.

Ask anyone.

Ask Cramer.

If the best you've got is "Our thesis is still intact," you've got nothing.


Mark said...

Jeff wrote:

"...Buffett is not saying "our thesis is still intact." He's saying "I don't care what the market thinks, because I know more than the market."

Maybe I'm missing something here, but doesn't "our thesis is still intact" mean that "the fundamental reason we like this company hasn't changed, despite what 'Mr. Market's voting (as opposed to 'weighing') machine happens to be saying today"?

Anonymous said...

Strongly agree with the commentary on "still in tact". I would bet one could make a decent living by just shorting stocks that are considered by the Street to have stories that are "still in tact".

One rule I have is this:

The "still in tact" phrase tends to come up when Wall Street's favorite names start to respond negatively to negative news, typically on high trading volume, and tend to have multiples that are difficult to justify- as was the case with Celgene (CELG). Other recent examples include any of the for-profit education companies.

When the Street starts saying that the story/thesis is "still in tact," what they really mean is that the thesis has changed completely, but we aren't sure why we are wrong.

Anonymous said...

All too often the phrase "our thesis is intact" is an excuse for allowing one's thesis to creep.

CELG could be an interesting short here (and maybe a canary in the coal mine for the whole drug industry), because its EPS miss appears to be due to weaker drug sales caused by the poor economy. Healthcare stocks have outperformed in the downturn due to the supposed safety of their EPS streams, despite the clear and present danger of health care reforms from the Obama administration. If they are about to start missing numbers just as the cyclical parts of the economy start to improve, look out below.

On the other hand, I dispute the comment above that CELG is an expensive stock. Even slower EPS growth for CELG will be well into the mid-teens, and growth in EPS is pretty low risk the next few years. Run a DDM on that, you'll easily get more than the current stock price. And shorting the stock could be dangerous, given the recent M&A activity in the sector.

All in all I'm on the fence on this one

jeff matthews' conscience said...

way to go jeff.

i wish there were more hedge fund managers like you, levering up and shorting stocks that are in 401ks and pensions...all the while taking down crazy people like cramer.

you and your hedge fund ilk provide an arbitration of value that is an irreplaceable service to the community. you judiciously halt the ability of companies to raise capital and push up the prices of companies that don't need to. after all, if their stock price can't hold up, they're worthless, right? markets know best. not the employees of those companies that actually make things.

keep up the good work.


your conscience

p.s. you have a talented conscience...with all that entering of the captcha and stuff.

Jeff Matthews said...

Anonymous: I don't have any opinion on whether CELG is a long or short--we never get into stock recommendations here.

But how do you run a "DDM" on a biotech company whose business is subject to the whims of not only the FDA, but of a Congress that seems hell-bent on making healthcare more affordable by making it less profitable?

According to my Bloomberg, CELG is trading at 33.7X trailing EBITDA, 47.6X trailing EBIT, and 165X trailing FCF.

Not much room for uncertainty, in my book.

But that's what makes a market!



Jeff Matthews said...

"Jeff Matthews Conscience": You've been listening to Patrick Byrne too long. Switch to decaf!

Oh, and ask all those bankers at Lehman and AIG and Citibank and Fannie Mae whether they made trillions of dollars of bad real estate loans at the behest of evil short-sellers, or if it was at the behest of short-term-obsessed mutual fund managers who insisted that AIG and FNM and C grow earnings 15% a year so they didn't have to do any real investment analysis.

You'll find the bankers did it for the shareholders, and their own fabulous bonuses.

Also, if you read something besides Deep Shmapture, you'll find nobody would listen when David Einhorn said it was all going kablooey.


Anonymous said...

One comment on Cramer, Jeff: Old habits die hard, sometimes.

Kevin said...

Best column in some time. Good insight. Yes, the thesis is still intact. In fact, it's in the mail with your check! Just remember, a guy don't walk on the lot lest he wants to buy. They're sitting out there waiting to give you their money. Are you gonna take it? Are you man enough to take it? And remember - Always Be Closing!

Ken said...

There may be a subtlety to "still intact." If it's the start of a defense which continues with other evidence, the stock might still be OK. But if it's the end of the defense... well.

Anonymous said...

"They're sitting out there waiting to give you their money. Are you gonna take it? Are you man enough to take it?And remember - Always Be Closing!"

after reading kevins comment, why do i feel intellectually violated in a way not too dissimilar from the way i feel after watching an infomertial?

i don't know whats worse, the fact that this guy is serious or that it happens to be on a blog that actually agrees with operating in that kind of ethical-vacuum.