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Cramer: Is This Market a Bubble?

Thursday, 11 Apr 2013 | 6:28 PM ET
Bubble on the Horizon?
Thursday, 11 Apr 2013 | 6:00 PM ET
Mad Money host Jim Cramer dissects the latest moves in the market.

U.S. stocks logged a fourth day of gains on Thursday, with the Dow Jones Industrial Average and S&P 500 index logging fresh closing highs, prompting some on Wall Street to worry about a stock market bubble.

So are the bears right to worry about a bubble? Jim Cramer addressed the issue on CNBC's "Mad Money."

To start, Cramer noted the S&P 500 currently trades at 15 times earnings, which is average compared to past markets. The Dow is trading at 14 times earnings, which Cramer said is "a tad cheaper, but again, no real bargain."

"You are paying about the retail price for the stock market right now. Some of you … don't want to pull the trigger unless there's a discount … I don't blame you one bit," Cramer said. "We had some nice discounts before the "fiscal cliff" and you can very easily say, 'oops, missed that sale, but another one always comes around.' The only issue I have with that is, given the huge run, the discount may not take this market as low as you will want."


Adam Jeffery | CNBC

Another way to value stocks, though, is by looking at how equities compare to bonds, Cramer said. Right now, the 10-year note yields just 1.875 percent.

"That's a ridiculous alternative even if it's risk free. In the past, when we've have that kind of rate, stocks have historically sold at 17 times earnings," Cramer said. "So while the S&P isn't cheap versus itself, when it's compared with the alternative from fixed income … you are getting a steal."

It's important to note that the Federal Reserve is artificially keeping bond yields down, too, by endlessly cutting the prime interest rate, Cramer added. In a sense, the Fed is actually helping drive investors into the market, he suggested.

But Cramer said critics are right to think some parts of the market have become frothy lately.

"Because the Fed is keeping down the interest rates of the bond competition, the utility index, which has all of these steady Eddie dividend payers, has now hit a four-and-a-half year high and has been up for eight straight days. That's just not sustainable and not right," Cramer complained. "I would not be buying a utility stock right now if it yielded less than 3.5 percent."

Before long, Cramer thinks utility stocks could tank, as could select food and beverage and big drug stocks, as their yields shrink from price appreciation. Cramer's charitable trust recently dumped out of Bristol-Myers Squibb, for example, because it sells at 2.5 times its growth rate.

"I don't like stocks that sell at more than twice their growth rate, as I like growth at a reasonable price, and that is unreasonable, and because the stock yields less than 3.5 percent, which, while bountiful versus Treasurys, won't necessarily cushion the stock if it turns out that Bristol doesn't deliver the already high bar earnings per share number that I'm looking for," Cramer said. "Bristol Myers is leaving no room for disappointment and the trust can always buy the stock back when it reports on April 25."

In the end, Cramer said the market isn't frothy, but does have a few "pockets of froth." Basically, people are simply paying too much for "best of breed," dividend-paying stocks that are deemed safe.

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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