Saturday, November 22nd, 2008
wash with downey

And so comes the news that Downey Savings and Loan has been seized and sold to U.S. Bancorp.  It had been the last of the top five writers of option ARMs (those museum pieces of the housing bubble) left standing.

Like many financial companies, Downey’s fortunes (and the stock price of its parent, Downey Financial) have been under relentless pressure for months.  But in the spring of 2007, the stock looked solid.  Dreaming of riches and sensing an opportunity upon seeing the first cracks in the mortgage market, I went looking for a stock to short, found Downey, and put on a very large position (for me — everything is relative).

Soon enough the stock started jumping and there was no mystery why.  Jim Cramer had proclaimed on Mad Money that the company could be “the next Golden West” (it was praise at the time) and that its stock could double if it became a takeover target.  One of us had to be wrong — and one of us had a too-big bet and the other had thousands of acolytes.  At least in the short run, I didn’t stand a chance.To disclose but not dwell, I traded around the position for a long time, and it was quite profitable overall (again, everything is relative).  Had I managed the trade better or held on for dear life, it could have been monstrous.

This, then, is the obligatory look at Cramer.  I’m told that you can’t get your official financial blogger certificate without writing such a post.

I have read Cramer since the inception of and continue to do so.  Especially in the early years, he got the investment milieu down pat in a way that few others did.  Buzz and Batch were archetypes of the dot-com model of stock jockey, and Cramer’s creation of them was representative of his industry knowledge, willingness to be controversial, and sharp writing skills.

You can see flashes of each of those things displayed on the tube, but they are wrapped in the skein of entertainment.  That word — entertainment — is also required in every Cramer posting, so I was going to avoid using it, until I realized that he often says, “My job is not just to entertain you, but to educate you.”  Notice the order.

It’s not that serious ideas aren’t dealt with at times on the show, and in a thoughtful way, but at the end of one such segment recently, a call was patched in that started with someone screaming, “Jim, BOOYAH, buddy!”

I often refer to the investment business as a game, perhaps like squaring off against Mr. Market in tennis whites, with the volleys going back and forth and points being awarded.  Or maybe it’s more like a golf tournament, where you are up against the course, the other players, and yourself.  While there may be better analogies, those games feature strategy, creativity, and the importance of regulating the flow of emotion, which are all needed by those who would attempt to succeed in the market.  Most of the games of Mad Money do not.  They are the province of steroid-laced linemen; part of a bigger picture of interest, but focused on collisions of brute force and celebratory belly bumps.

At the core of the show is a tension between homework and hutzpah.  On the one hand, each show starts with Cramer’s claim of “two thousand stocks in my head” on which he can fire off opinions.  On the other, he tells viewers that they need to do an hour of research a week for each stock in their portfolio.  Even crediting Cramer with years of experience to make some shortcuts, the math doesn’t add up.

Perhaps his errors on Downey could have been avoided had he poured over its filings and the publicly-available information on the housing markets it served.  Instead, it appeared from his comments that he was swayed by the presence of a large holder he respected and the possibility of a short squeeze or a bid for the company, which had a small enough capitalization to move far and fast in response to some well-placed sponsorship.  Stylistically, Cramer is a momentum player, as is evident by reviewing his mentions of Downey on the show (initially positive and then some bullish and some bearish over time), which display the pattern of errors that occur when that strategy isn’t working.

I have not read any of Cramer’s books, but I would guess that there is much in them of value.  He has the ability to help investors, it’s just that the best of what he has to offer is obscured when they point a camera at him, and his bravado gives a false sense to those that would take his picks at face value.  The mediumthe research puzzle | I previously wrote about CNBC in “symptomatic of the age.” doesn’t amplify his strong points and minimize his weaknesses — like print does — but rather the opposite.

So follow your mother’s advice:  Turn off that set and read something.