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  Friday, 03/07/08
 Posted 03/09/08,  10:31 pm ET

(Scroll down to see Jim's comments below)
 
 
Today's date:  Friday, 03/07/08
  Dow Jones: 11,893   - 146
  NASDAQ:   2,212      - 8
  S&P 500:   1,293     - 10
 
 
 
 
 
First Segment
 
 
Opening Segment 1 Title: 'Cramer's Game Plan
  For Next Week'

.  .  .  .  .
Featured Stock(s): Annaly Capital Management (NLY*)

See NLY*'s official website here.

See the Yahoo! Finance profile for NLY* here.


 See Opening Segment 2, below...
 
After this segment, you can see Jim's Lightning Round picks here...


JJC:   A bed of nails... that's not fun!...  I'm trapped in the stocks... no pun intended...  I'm sitting on the old bed of nails for the most brutal torture session imaginable... because, in the case of Annaly Mortgage (NLY*) versus Jim Cramer, I'm guilty of capital destruction in the first degree and, in Cramerica, that makes me eligible for some pretty darn cruel and unusual punishment...

That's right!  You know what I did...  I got behind NLY* because I thought it could withstand the credit crisis.  Even though it relies heavily on borrowing money, because it only invests in bonds that are supposed to have the implicit backing of the federal government...  But NLY*, the stock, has been taken apart... and that's because even NLY*, the company, is vulnerable.

The stock is down a catastrophic 27%, from $20.44 to $14.99... It's like a cents-off sale at Walmart, that soup kitchen of a store... since I brought NLY*'s CEO, Mike Farrell, on the show on February 6th...  and I also put my money where my mouth is... my charitable trust bought a ton of it...

There's a lesson to be learned here...  a lesson to be learned about where I went wrong with NLY*...  and it's a lesson that should be part of your Game Plan...  not just for next week, but for as long as time goes on...  Because, as long as our financial system's in trouble, you can't afford to make the mistakes I did.

.  .  .  .  .

So where did I go wrong with NLY*?   And how can you avoid my mistake in the future?...

For months, I have said repeatedly that you cannot own stocks that borrowed large sums of money from banks and brokers, in order to make money...  There isn't enough liquidity in the system...  not enough money!   Banks have become cautious lenders... You know what they are...  because they've got a lot less money to lend...

But no, not me... Mr. Smarty-pants...  I recommended NLY*, even though that's exactly what it does... it borrows from banks and brokers at a low rate.  It was 4% the last time the company reported... and then takes that money and buys bonds issued by Fannie Mae (FNM) that pay about 5%...  It's called "spread"... not much of a spread, a 1% difference.  But, if you do it over and over and over and over again... which requires more and more borrowing...

To make a sizeable profit, NLY* doesn't just have to borrow... it's got to borrow at about nine times the amount of money that it actually has in the bank... money it raises by issuing stock... stock that I told you to buy...

Okay, so nearly every day, I'm telling you to stay away from companies that rely on massive borrowing to make money, and then I recommend NLY*?   How could I have possibly justified that?...   

I thought that NLY* was an exception...   The company was and is led by Mike Farrell - truly the best in the business - a guy who got sub-prime totally right from the beginning...  and, because NLY* was buying the safest bonds out there... just short of the U.S. Treasuries... the mortgaged-backed issued by Fannie Mae that have what is known as the "implicit backing" of the government, I figured... I don't know... the company would be immune... to all that bad paper we hear about all the time... all those toxic mortgages... because the stuff was pretty much considered to be as good as gold my whole life...

I thought NLY* was an exception, because it's so conservative... so safe...  such a good record... and it only buys the premium stuff.   What company wouldn't want to lend Mike Farrell, and NLY*, money?...

Their mortgages were supposed to be backed... implicitly backed...  All it took was if Hank Paulson, the Treasury Secretary came on Meet The Press, and said "we stand by them"...  That would be the end, but no...  they say nothing... they say nothing... 

.  .  .  .  .

But now I know there are no exceptions to my rules.   All those reasons I had... In the end, they meant nothing...  They were just like lying on a bed of nails...

Those bonds issued by Fannie Mae... the ones that should have been the safest paper, short of U.S. Treasuries?...  Well, the Treasury Department is saying nothing about that guarantee.  That's got the Street totally freaked out...

Suddenly, investors are worried that agencies, as they're called on the Street, will default...

.  .  .  .  .

With NLY* owning so much of the stuff, and the Wall Street market down nearly everyday, this is presumably really hurting their ability to borrow... even as the company assures us not to worry...

If NLY* is right, and we shouldn't worry, then there's another problem...

Simply put, NLY* borrows from brokers... and the brokers, they're just out of money... or they're worried that they won't get their money back from NLY* and everybody else... because the agencies it owns will default...  That's right, they're worried about Fannie defaulting...  They've just decided that they've lost so much money... that there's just such terrible pin action...  that everybody's going to lose money...    

.  .  .  .  .

Yesterday, everybody figured out that NLY*'s borrowing "problem", which they may not even have, means it can only raise capital by issuing more stock... and that can dilute you if you own the stock... which is why the stock sold down so hard again today...

Now that NLY* may not be able to borrow at nine times the amount of collateral it won't be able to, I believe, make enough money to beat my estimates...  Maybe it won't be enough to raise the dividend, like I was hoping...

If it turns out that NLY* can only borrow at four times its collateral, then its earnings and bountiful dividend may not hold up...

That's why people are selling...  That's why I'm in the stocks, torturing myself...

If this is the fate of NLY*, the best-run, most-conservative player in the mortgage game...  how can we even consider buying another company that relies on borrowing a lot of money?

The truth is, if you need to borrow, you're on life support...  I don't think anything else about your company matters - good, bad... they're all in trouble if you need to borrow from a bank or a broker... 

.  .  .  .  .

The Bottom Line!:      Annaly Capital Management (NLY*) proves it.  I was wrong.  No exceptions...  The company has to borrow a lot of money.  I believe its stock has to be sold, no matter how much you like the business or the CEO.  That's your Game Plan.  Unless you want to join me on the stocks... unless you want to sleep on a bed of nails...  it might not make you money, but my Game Plan can save you a bundle.


 [See Jim's 2nd Opening Segment stock picks below... ]

 

 

 

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■

Stock Snapshots - Includes all stocks mentioned above

 ■
 

 

 

Jim
Cramer's
rating on
this stock

STOCK
SYMBOL

Closing
price
that
day

Opening
price
next
day

Full Company Name/Comments
(see comments above for each)

NLY*

15.00

15.41

Annaly Capital Management (NLY*)
       

 

 

Mutual-Fund-Holdings.com
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Top 25 holdings - The No. 3 Top-Performing Mutual Fund in 2007

 
 
Second Segment
 
 
Opening Segment 2 Title: 'Tour De Force'

CEO Interview with
Marc Benioff, CEO

.  .  .  .  .
Featured Stock(s): Salesforce.com (CRM)

See CRM's official website here.

See the Yahoo! Finance profile for CRM here.


See Opening Segment 2, below...
 
After this segment, you can see Jim's Lightning Round picks here...

        

Jim's Comments BEFORE the interview:      You know me... when it comes to stocks, I think it's better to be safe than right...   Back on January 9th, we were presented with what I regarded as a classic investing conundrum... Salesforce.com (CRM) was on the same day, simultaneously upgraded by UBS, and downgraded by Goldman Sachs.

I sided with Goldman, and said you had to sell.  Now, I had no doubt that CRM is a great company... let leader in a fabulous business... software as a service... with the best CEO in technology... Marc Benioff...  He is, he's the best.  He also is the hardest-working...

I even said their next quarter... the one they just reported last week, on February 27th... was going to be stupendous... and, hallelujah, it was...  But, while I had no doubts about CRM, the company, I said to you, that CRM, the stock, was too risky...  I had been worred that it was priced to perfection... If Benioff didn't deliver a blowout of blowouts, it would crater... as momentum investors, and weak hands, desperately sold the stock down...

At the time, CRM was trading at $54.33...  and I thought it was a situation where you could potentially lose $30, if things went wrong... or make $10, if everything went right...   I used my judgment as a stockpicker, not as a businessperson.  $10 up, $30 down... I figured a terrible risk/reward... so I said stay away...

Now, after sinking to $47.06, down 13.4%, when I said to sell it on January 9th, Benioff and CRM just delivered the most perfect quarter I have seen this year... in terms of revenue growth... 

Yeah, his stock was priced to perfection... and perfection is what he gave us...

So, was I wrong?...

Well, the stock is only trading at $56.66 now...  It's up $2.30 above where I said it was too risky... but, the market has just been killed since then...

So, you missed the 4.3% gain, if you listened to me... but, then again, this was just an unbelievable stock in a market that's horrible...  I don't think the gain was worth the risk, but you may disagree with me...

I think I made the right decision as investor, because the risk was too great... even as I obviously got the company and the stock wrong, because I didn't give enough credit to the man and his team...  and I still feel that way...

But, you know what?...  It's good to have something work.   The question is now, what to do with CRM, after its blowout quarter.  Benioff gave us 6 cents of earnings per share, when the Street was only looking for 4 (cents)...  He grew sales at an incredible 50.4% clip, year-over-year... that's unbelievable.  And he delivered the greatest single upside surprise that I have seen since January began...   The best of 2008...

But the stock's valuation... I don't know.  It trades at 170x earnings, even though it should grow at 39.1%...  A long-term growth rate of 47%!...   It is hard to say that this stock is anything but expensive!...

But the amazing thing to me is how CRM has held up, as the vast majority of momentum stocks have fallen by the wayside...

I think I'm going to call Salesforce.com (CRM) the last momentum stock standing...

Maybe that's because Marc Benioff has proven that he can deliver perfection, when perfection is what's needed...

I want to know how he did it... I want to know what he's going to do next...  And I wanted to introduce him to you, because he's an amazing man who has written great books...  Compassionate Capitalism... The Business of Changing The World...  These are great books.  I read one of these in preparation for a speech that I gave recently at Bucknell...  because I thought it was just so smart, how corporations can do well.  He's an heir apparent, I think, to the great Drucker... Peter Drucker, if you ever read it...  Enough me.  Let's go to the man...