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Cramer: The Catch-22 Behind the Bull Rally

Tuesday, 26 Mar 2013 | 6:00 PM ET
Cramer on the Dow's Dilemma
Tuesday, 26 Mar 2013 | 6:00 PM ET
Mad Money host Jim Cramer explains what today's housing market means for your portfolio.

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Developments in the stock market are not always as they appear. Right now, Jim Cramer thinks an unexpected phenomenon is currently at play.

"If you don't build it, they will come. That's right, don't build anything new, profits will come to those who already dominate the space," said Cramer.

The idea is somewhat counterintuitive.

Conventional wisdom would suggest a bull market rally would be generated by business formation. That is, a creation phase in the economy would launch new companies, which in turn would make new jobs and drive GDP. In turn stocks would go higher.

Instead, Cramer says the rally is being driven by just the opposite. That is, there's so little business formation that those companies already in place have effectively cornered the market – they and only they are benefiting from whatever uptick the economy can generate.

"Let me walk you through it," Cramer said.

Using housing as an example, Cramer said the latest Case-Shiller report showed that housing prices are up in all 20 cities covered by the index. Read More: "Home Prices Up, Best Yearly Increase Since 2006"

"But these increases are happening because the home builders aren't building houses fast enough," said the Mad Money host. That is supply can't keep up with demand – therefore price goes higher.

"And as prices go higher, profits accrue among those already dominant in the industry." That translates into higher stock prices for the homebuilders.

Cramer said the same thing is happening in the hotel industry.

For existing companies, "revenue per room is going up, in some case into the high single digits. Why? Because the industry's not building new capacity," Cramer said.

That drives shares of existing companies such as Wyndham Worldwide, Marriott and Starwood. They can raise prices.

Airlines provide another example of the phenomenon.

"You can't get new planes any time soon so US Airways, United Continental, Delta and Spirit don't have to worry about competition," Cramer said. "Nobody's building, so prices go up and profits follow."

Adam Gault | OJO | Getty Images

Cramer also pointed to the auto industry as another example. "Right now there aren't enough autos to go around and there's consolidation in the space." Therefore the price increases have been bountiful.

Cramer thinks the refiners are in a similar boat. "There hasn't been a new refinery built in this country in nearly 40 years," he said. "I think HollyFrontier is in the best shape to profit from this lack of new capacity."

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Here's the Catch-22. The market can go significantly higher while employment and GDP languish.

"In fact the fewer jobs created the bigger the profits," Cramer said.

"I think markets continue to hum along just like this," Cramer said. "And Wall Street will love it. Just long as we don't build anything."

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

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