Thursday, October 16, 2008
(Cont'd from above)...

This market is being controlled by two nefarious forces that are out of our hands...

The fundamentals of the world's economy, and the fundamentals of the hedge fund industry. Neither set of fundamentals is sound.

In fact, right now, both are frighteningly awful, and the two forces have coalesced to drive down both good and undeserving stocks alike. We have a weak global economy, coupled with hedge funds that are being forced to sell, as their clients pull out their money - or what's left of it - hand over fist...

TrimTabs Investment Research... I read it in the Financial Times this morning... reports $43 billion in withdrawals from hedge funds this September alone. I bet it could be as much as triple that in the month of October, when the average fund is borrowing at least twice as much as it's running.

You know what you're talking about?...

You're talking about a couple of hundred million dollars worth of stocks that must be sold, just to give the poor little rich people, in these funds, their money back. That is a gigantic amount of selling pressure...

Alright, you hear about these hedge funds... big, big, big...

What does it mean for you?... What does it mean for the average guy... the Joe?...

It means that there are a lot of stocks that used to have low dividend yields, because their stock prices were so high, versus what looked like meager dividends... they have now big yields... simply because of the unbelievable declines that we've experienced. The roller coaster's going down, and the dividend stays the same. Boom, the dividend (yield) is big...

Because of this massive selloff, the market is littered with broken stocks. Not all of them are broken companies, and Cramer is going to tell you which ones are which...

Alright, I want you to take a look... Now, this is a retrospective one... It didn't start as that. I did my work last night on this one... and, sure enough, what happened? Well, Goldman Sachs recommends the stock I was going to recommend, but we're going to use it anyway... Kimberly-Clark Corp. (KMB), okay... Yeah, you know... like Kleenex... like diapers...

KMB was up huge today, up almost $4 bucks off of a recommendation from Goldman Sachs, and it is a great example of what can go right in this market. You see, this company normally had a meager yield. Not it yields 3.86%. That's historically very high... Don't pay up for it (i.e., buy the stock, at a high price) after today's rally. Wait for the hedge funds gone wild to take it down again.

Why has KMB, a big tissue and diaper maker, been taken down to the point where it's become a higher yielder?... Well, the main reason it went down was because of skyrocketing commodity prices... But wait... commodity prices have collapsed! Everything from the pulp of paper, to the petroleum for diapers, because of the weakness in the global economy, and the endless selling by, again yes, the hedge funds gone wild, that also bet on higher commodity prices.

In the meantime, KMB's stock has collapsed, along with the market... even when you factor in this rally today... in part, because it has the misfortune of being a member of the S&P 500, and forced selling by hedge funds gone wild has put pressure on all the stocks in that index, because to raise capital, to pay off their rich - but now poor - clients, the hedge funds have to sell stocks, and they also have to sell S&P 500 futures, so that's going to keep pressuring good companies, along with bad.

Now, add it all up...

So what do we have here? We've got lower commodity costs... we've got lower stock prices, which mean higher yields... and pretty consistent topline growth... which means sales... because the company makes a necessary product...

And what do you got?...

You've got an opportunity... all aboard... particularly when KMB gets pushed right back down by the hedge funds that keep liquidating. These positives are why the stock could rally, and why much of the market rallied today.

Now, how do you buy KMB?... Do you just go and say, listen, buy me 100 shares of KMB, at the market, if you want 100 shares?... Wrong. No, you never pay market (i.e., placing a market order vs. a limit order), and you never pay up in this market. Not with this tremendous downturn continuing...

See, the stock now is, of course, too high after the Goldman recommendation but, on a pullback, it will begin to get very attractive. You must let the stock come to you, as that yield is your only protection from hedge funds gone wild. And the yield shrinks when the stock goes higher. I know this is a hard concept for the newer people but, you know, if the dividend (dividend dollar amount paid per share) is steady... obviously, if the stock goes down, the dividend produces a higher yield (percentage). If it goes up, it produces a lower yield. [Ed. note. For example, if you have a $1 per share dividend on a $10 stock, that produces a 10% "dividend yield"... If that same stock price goes to $20 per share, the dividend yield percentage (i.e., 1 divided by 20) changes to a 5% level.]

So let's say you wanted to buy 200 shares of Kimberly-Clark Corp. (KMB)...

Well, you should wait to make your first purchase... a quarter of your position only... not all 200. 50 shares. Commissions are really low. You can do this... 50 shares, until it comes back down to $58, where it will yield 4%. Then, buy the next quarter, another 50 shares, after hedge fund selling drags it down to $51.50, where it will yield 4.5%. The next increment is at $46, where the stock yields 5%. And, if you should be so lucky to get that price, and so on...

See, with my method, what I'm talking about is, when the market goes down, we don't feel bad. And, when the market comes down, we don't curse at it, and we don't cry. We use it to get higher, higher yields.

Why use such a wide scale? Why not wait for smaller declines?... No, because, even though the hedge fund selling is creating a great opportunity, it's not so great that you could put all your money to work at one level. That's just arrogance, and what you'll end up doing... I write about this and the psychology of investing in Real Money: Sane Investing In An Insane World... you'll end up buying it at $58, and then selling it at $54, because you bought all at one level and you can't take the pain...

Just one broken hedge fund can beat the heck out of this market. These funds use so much leverage... they borrow so much money... that a $17 billion outfit can actually be swinging around $170 billion. And, usually, at least two or three funds will have that same strategy. That's how you get big moves like Monday's rally, up 1000 points... and then yesterday's selloff... the worst in the S&P.

These are all just hedge funds selling, liquidating, and then hedge funds covering their shorts. It's all hedge funds, okay... It's not the companies. It's not you. We go up or down a percentage point or two normally, right? But, because of hedge funds gone wild, when we (normally) go up 2, we go up 10. When we go down 1, now we go down 7. It's all because of these funds.

You have to use the hedge funds' withdrawals to your advantage. Don't mope about it. They are going to continue, and they will allow you to buy a good company like KMB at lower levels than you should, where the yield will be high... high enough where you can hold it through this period until things get better.

Let me reiterate...

I don't think you should buy KMB at the current price. It was just moved up by Goldman in a plus-400 day...the stock had a big run. That's not our style. But, when the stock... notice I didn't say "if"... I said "when" the stock comes back down, you've got to be ready to pull the trigger. As a matter of fact, I'd even put the order in for tomorrow. I'd put the order in at $58. I'd buy 50 shares (if you plan to buy a total of 200, that makes 25% of your position) at $58...

You can pretty much pick any new-found higher yielding stock... Merck (MRK), DuPont (DD), or Duke Energy (DUK)... and you should focus on the ones with less economic sensitivity, where you know the dividend will be safe. Even though you know, again, I'm drawn to a Nucor (NUE), because they reported a decent quarter... but I want to make it easy for you, okay. And those like KMB, where the commodity exposure... where their costs are going down big... they're going to report good quarters.

Here's the bottom line...

The bottom line!:   In Yield, We Trust... Sure, this is a cautious strategy... these are cautious times... these are perilous times. My cautious strategy is going to cause you to miss a Google, Inc. (GOOG), which just rallied up $40 on a good quarter. But it will also miss tons of stocks that have dropped 60,70, 80, 90, 100%... that had no yield support whatsoever. In Cramerica, we're sticking by our capital preservation strategy, until all the money the governments around the world are putting to work makes things better, and the hedge funds gone wild are driven out of business. And, believe me, the latter will happen before the former.

Read Jim's next Segment here