Many people have seen or heard James Cramer’s Mad Money and it makes sense every once in a while to reread his books. The process typically does not change, the names of the companies often do. In rereading his book Real Money, Simon and Schuster, NY, 2009, it provided very good lessons to write about.

In part one the formula E x M = P or Earnings x Multiple = Price was introduced. All parts of the equation can easily change and people spend many hours trying to determine what numbers are the rational ones or where the market should be. If the rational price is different than the existing stock price, then there is money to be made. For example, if a company is trading at 10 multiple or (10 times the earnings) and the market is trading at 15, then maybe the multiple of the company should rise – the big questions are why and when? It is time to consider the macro picture or the big picture. The economy moves through cycles – which means most companies except for oil, defence, aerospace and telecommunications stock prices will go up and down as GDP goes up and down. Simply changing your allocation or following the cycle will make you more money than standing pat. As the Federal Reserve (Fed) eases and tightens interest rates it affects companies. As interest rates rise, those companies who depend on capital (money) will find business more trying, as interest rates lower they will have more money. Think about paying a loan – low rates, low payments, high rates – higher payments. Bring that thinking to companies – right now we are in a low interest rate environment, rates may go higher in the future – what companies benefit, what companies do not. The cycle is

GDP annual growth           Fed action                 Cyclical Investing and Trading

2%                                                                   buy high multiple tech stocks

1                   slowdown evident eases rates  buy banks and financials                                                                          retailers and housing stocks

0                                                                  buy auto stocks

-1                 more Fed easing of rates        buy low-multiple tech stocks

-1              4th Fed easing of rates

0

1             Fed is neutral                             buy paper and chemical

2                                                               sell medicine and supermarket

3                                                              buy ‘smokestack’ industries

Fed begins to tighten                 sell financial, housing, retailers and auto

4            More tightening                           buy metals and minerals

4 plus                                                      sell paper and chemical

3                                                             buy medicine and supermarket

2              more tightening                     sell smokestack

1               Fed is neutral                        sell metals and minerals

0              Fed begins to ease               cycle starts again

The above in general means that some stocks benefit more depending on where the normal economic cycle is. All stocks have highs and lows, by switching allocations, you will tend to buy near the historical lows and sell near the historical highs. Mr. Cramer recommends always try to buy the stocks which are the best in class.

Linking to dividend paying stocks, those stocks that have paid dividends for many years stock prices go up and down, however due to the dividends and good management the prices have a floor and will bounce back faster. If you do not rotate your stocks, the important aspect is for the dividend to be paid. If you do rotate pay attention to the normal economic cycle chart.

There are more questions than answers, till the next time – to raising questions