Friday, April 17, 2009
(Cont'd from above)...

Jim (cont'd):   

Welcome back to this special 20th anniversary of CNBC edition of Mad Money… tonight we are looking at the lessons of the past to help you become a better investor in the future… I am here to coach you… to teach you how to manage your money… and that means that we talk about a lot of things… how to evaluate stocks… how to understand what the market is saying… listening to the market.. and what controls the market at any given moment… I use the control in a very specific sense… I mean what factors are ultimately pulling the stock markets strings… for every market it is a little different… but one thing is always true… stocks follow bonds.

The credit markets, those are the bond markets… are a much more important way of determining the health of corporate America then by simply looking at equities or stocks… it is much easier for regular people to make money in stocks… but they can’t make the mistake in believing that stocks are where all the action is… this is a truth that I hope that many people have learned over the last 2 years… where it was the housing markets, mortgages, and the capital markets, fixed income credit, that controlled everything… and what happened in the stock market could have been predicted by looking at the mortgage market more than it could have by looking at earnings.

When I went to work at Goldman Sachs 25 years ago I was shocked… shocked, shocked…to learn that the stock market was just a minor league team vs. the majors… the bond markets, well, that I was following the Toledo Mud Hens when I was talking about stocks… the proud triple a farm team for the Detroit Tigers… or maybe when I think about the stock market, it turns out that I was following the Redding Phillies… the double a version of the Philadelphia Phillies… or heaven forbid, I was really following the Loadie Dodgers, single a step child of the real deal, where I won a drawing to throw out the first ball and couldn’t reach home plate, cause I throw like a girl… but these days it means that I throw like Jennie Finch, which I am always happy to be on the receiving end of that pitchers arm.

But I learned quickly at Goldman Sachs, I learned from John Corzine, he is the current governor of New Jersey no less… who at the time ran the bond desk at Goldman Sachs… I learned that the action was in what we call fixed income… what you know as bonds… and that you monitor the health of the economy not just thru the stock market but also looking thru the availability of credit, of loans… consider the bond market one gigantic credit card or mortgage… just like how most people can’t buy things at the mall without a credit card… and can’t buy a house without a mortgage… most companies can’t buy what they need without functioning credit markets… they can’t pay their people sometimes without credit markets… that is why fixed income is like the score cards for the Boston Red Sox… and stocks are more like the Potohawk version.

I say all of this to help you understand where I was coming from with the rant heard around the world… the much YouTubed clip where I predicted financial Armageddon on August 3rd, 2007... how did I see this coming when the Fed did not… when most players in the stock market didn’t either… well there was the Bear Stearns conference call, you always listen to the conference calls as part of your homework… and the notion of what I call behind the scenes, what I call the dark side of the road… in omish to Van Morrison on this show… it was dawning on people that bonds they had valued at billions and billions of dollars were not worth anywhere near that… including the Bear Stearns portfolio… and the default rate on home mortgages was about to go out of control… that is what was going on at the time… but nobody seemed to understand the importance of the housing market to the bond market… and therefore the bond market to the importance of the stock market.

This is something that I never want you to forget, so pay attention…

[They then showed a clip of Jim on 8/3/07 talking about Bernanke]

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