On tonight’s MAD MONEY on CNBC, Jim Cramer said he is going at least address the doomsday scenario in the financial markets even though he doesn’t think it is reality. This would be the extreme bearish scenario just in case the worst thing happens. Just in case…. The 3 groups in trouble are homebuilders, banks and mortgage brokers, and brokerage firm stocks.
Homebuilders are a total mess, and the only one he thinks isn’t a disaster is MDC (NYSE:MDC). South Forida, Phoenix, California are all in trouble and way overbuilt and he thinks some homebuilders could go under in theory. Out of the lenders Countrywide (NYSE:CFC) is the only honest one about exposure and how bad some of it is. The worst case is that 50% of home buyers could walk away, although Cramer doesn’t think that will occur. The brokers could lose all the private equity business and lose all the mortgage and derivative lending. They could even see estimates fall 50% and they could see numerous headcount reduction. Bear Stearns (NYSE:BSC) is in these the deepest, but all the brokers are in the same boat.
Later on MAD MONEY, Cramer did note that if the FED does end up cutting rates, then you could actually see these stocks soar. He even noted that emergency rate cuts could add 50% to some of these names. Now before you go panic, keep in mind that this isn’t what was being predicted. But this is what the absolute worst case scenario believers are thinking. Cramer doesn’t think this is going to happen.
I don’t believe this will happen either, for whatever that is worth. I recall seeing these debt implosions left and right affecting private and public pension funds back in the mid 1990′s, and it blew up many firms and many jobs were lost as a result. These "toxic waste" products cause a lot of pain, but if they crater the economy and implode many of the large diversified brokers and investment houses then the world has changed. In fact, that means the tail will have wagged the dog. These deep implosions always overreact and in the end will create some great opportunities for those with the fortitude and foresight on being the right timers to buy.
Jon C. Ogg
July 30, 2007
Jon Ogg can be reached at firstname.lastname@example.org; he does not own securities in the companies he covers.