Mad Money: Recovery: As Easy As L-U-V - Game Plan

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Feb.08

6:57 PM ET

Friday, 8 Feb 2008

Recovery: As Easy As L-U-V

Posted By:Carlo Dellaverson

Topics:Recession | Economy (U.S.) | Stock Market | Stock Picks

Friday’s Gameplan was all about one word and three letters. The word is recovery, which comes in only three shapes: L, U and V.

Let Cramer explain.

People who bet on a V recovery think the economy is going to snap right back because of the Fed rate cuts and the cuts that could be coming. These are the people buying up the homebuilders and bond insurers, Cramer said. Stocks like Toll Brothers [TOL Loading... () ], Pulte [PHM Loading... () ] and DR Horton [DHI Loading... () ] wouldn’t be ramping unless these investors believed in a sharp and swift upturn. These are the same people choosing between Ambac [ABK Loading... () ] and MBIA [MBI Loading... () ] because in a V recovery even the toxic bond insurers aren’t in any danger. Cramer thinks V enthusiasts are too aggressive and assumptive in thinking a recession is already coming to an end. Because the market goes higher when they take over, he would sell into them.

On the opposite end of the spectrum are the people who believe this recovery will be an L, which points to more of a stabilization than a full-blown recovery. The L crowd likes stocks with a little cyclicality like McDonald's [MCD Loading... () ] or Verizon [VZ Loading... () ] or Pepsi [PEP Loading... () ]. When the market is down big, it’s because the L enthusiasts have taken control and that’s almost always a good time to buy, as far as Cramer is concerned.

Finally, there are people like Cramer who believe in a U recovery. The thinking among the U crowd is that a recovery will be slow and grinding but ultimately successful. It also means there’s no hurry to buy so it’s best to wait for pullbacks and to not get too excited about anything but those companies that will come back in six or ninth months or a year, Cramer said. People betting on a U recovery load up on stocks like Kohl’s [KSS Loading... () ], JC Penney [JCP Loading... () ] and Jones Apparel [JNY Loading... () ], betting things will be better a year from now. They aren’t afraid of missing big moves because they believe the market will come to them. They like the banks, but they aren’t chasing them because they know the Fed’s cuts aren’t endless.

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As a believer in the U recovery, Cramer would buy when the market swings in the L direction and sell when it’s in a V mode. It’s that simple.

Jim's charitable trust owns McDonald's.

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