“Let me tell you why I think their worries are history. Particularly after today’s events resolving GM. I think their fears, your fears, are history. Because back over last summer before it seemed like the world was coming to an end… I used the term over and over again the black holes. The seven black holes in the system that could bring us all down. I revealed these holes well before the fall of Lehman Brothers and AIG, and I urged the government to take action all the way back then, in order to stem the losses before all seven of them went down. None of the black holes were filled by the government in time to avert huge disasters… Let’s go overt black holes. So you know exactly why I tell people to come on, get in, its not too late. It’s what were the original seven? What black holes did I say must be addressed to avoid Armageddon. First, I said Fannie Mae and Freddie Mac had to be put out of their misery and seized by the government before all the different securities they issued to fund themselves would be worthless. Black holes filled for certain…Although its a shame that the preferred shares were wiped out, Bernanke has used these two wisely to help bring down mortgage rates.
Today, in a completely gratuitous slap at Bernanke, Liz Rapaport — I know she didn’t write the headline, “Fed Mortgage Efforts Prove Costly.” Criticizing Bernanke for his incredibly prescient plan to buy Fannie Mae and Freddie Mac mortgages to keep rates down. Do you know, the only reason they’re rising now is because of it’s not inflation. People are buying homes like mad now in major parts of this country, and there’s tremendous demand for mortgages…
And finally, there’s GM. I did not think a bottom that would be attractive to the risk-averse crowd, as opposed to the people who were willing to wade in with my call at Dow 6500 that the worst was over, the down side was minimal, and the time was right to buy, I didn’t think the risk-averse crowd would come in until GM was dealt with. It’s important to recognize that as with AIG, Fannie Mae, Freddie Mac, and Lehman it didn’t matter how, how they were resolved as those black holes like GM really had been filled only in the most awful way possible, and at tremendous cost to the taxpayer. But what mattered wasn’t the what mattered was that they were solved and filled in, period.” CNBC’s Mad Money 6/1/2009
You might think that someone that follows Jim Cramer closely would not be surprised by anything he says, but the fervor of his bullishness is pretty surprising after the sizable rally the market has already experienced. It has been nearly 9 months since Cramer originally discussed his 7 black holes, and by “black holes” he is talking about companies that, were they not addressed would present a systemic risk to the markets. Lending credibility to his argument is that, in hindsight, his original seven have proven to be just about right on the money. His original seven firms that if left unchecked could bring all stocks down were the following; Lehman Brothers, AIG (AIG), Fannie Mae (FNM), Freddie Mac (FRE), Citigroup (C), General Motors (GM) and Ford (F).
Considering he singled out these stocks when the S&P 500 was still in the mid-1200’s and prior to the collapse of Lehman, his scorecard looks astoundingly good. Of these companies, Lehman is gone and with the exception of Ford, the others have all been nationalized to one extent or another. It appears that Ford will be able to make it through the economic downturn without the need for government assistance, as just today the company reported better than expected sales and a ramp up in production. Now that General Motors has finally filed Chapter 11 the uncertainty surround all of these issues is gone. To Cramer, the fact that these “systemic risks stocks” have all been dealt with or are on the mend suggests to him that now even the risk averse investors will be brought in from the sidelines and markets are poised for further gains.
He may be correct, and he should get credit for his foresight on these seven firms specifically. But for my two cents, it seems a stretch to say that the bankruptcy filing of one of the most iconic firms in American history would inspire the truly risk averse to get into the stock market again. The lack of better alternatives in the bond market, real estate, and treasury debt seems more understandable. The GM situation was the the remaining “black holes” to be dealt with, but this is far from a surprising event to the market. This bankruptcy has been speculated, reported on, and discussed for more than half a year now, and this event had already been priced into the market long ago, as evidenced by the markets strength on Monday.
Cramer has every reason to make a his viewers aware that he was essentially right about the seven black holes, save Ford. However, it just seems the GM bankruptcy is not something that the market will rally around and prolong the market’s rally. The only thing that will prolong the rally will be further improvement in economic data and/or a rebound of corporate earnings.