A Defensive Tone from Cramer

“Dividends — well, the yield that usually tends to bring in buyers who stem the decline. And unlike the income you get from treasury bonds, which are considered the safest investment…You reinvest your dividends — let’s take McDonald’s 3.5% yield. You’d still double your money in about 21 years…

But Intel? McDonald’s? Clorox? Sanofi-Aventis and Eaton? They strike fear in the hearts of the bears and turn ferocious ursas into, well, Yogi, into Boo-Boo, into Gentle Ben, into koalas, into cub scouts!” — CNBC’s Mad Money 11/30/2009

Investors who have paid attention to Cramer during the last six months know that the rally has had no more ardent cheerleaders than Mr. Mad Money himself, Jim Cramer. However, even he cannot deny that the market is starting to become a bit more risky. The risk is not due to the real estate debt scare in Dubai, which Cramer says will probably blow over with little impact on the U.S. market. That being said, he believes there are a lot of bears ready to pounce and the Dubai World debt incident may provide a catalyst to short the market. Of course, after a sustained rally as we have experienced since March, it would be understandable to see at least some correction to cool this market down.

In anticipation of a possible correction or a full blown sell off, Cramer is advising viewers to consider dividend stocks like Intel (INTC), McDonald’s (MCD), Clorox (CLX), Sanofi-Aventis (SNY), and Eaton (ETN). Obviously most of these stocks are defensive in nature and will be less harmed by a sell off. In addition, the fact that short sellers have to pay dividends should protect these high yielders from excessive shorting punishing the stock.

At Ockham, we have also become skeptical that this market’s risk-reward profile provides enough upside to be aggressive. The valuation of the market has become precarious given current (weak) fundamentals, and if Cramer is correct short sellers may start to dig in and wait for the correction. That would suggest that not only is valuation unfavorable but sentiment may be turning negative as well. Some people follow what Cramer says, while others see him as a contrary indicator. We simply think it is worthwhile to know what he is talking about, because like it or not, he moves stocks.

A Defensive Tone from Cramer

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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