For a long time now, hedge funds and other big money managers have operated on the assumption that the world’s central banks would pump cash into the system to keep their respective economies afloat. As a result, these investors have crowded into the hard assets that go up in price when demand returns: steel, oil, aluminum and their derivatives, such as drilling, natural gas and fertilizer stocks. The crowding pushes up prices.
The problem is the damage caused by big money’s decision to dump and run. And that’s just what happened after speculation hit last week that Europe might cut back on its stimulus and oil this week failed to break through $72 a barrel. Also, Potash announced on Wednesday that fertilizer prices would have to come down because farmers’ end markets have dropped in value, which is why POT fell $11.60 today, Mosaic slipped about $5 and Agrium lost $3.44. The mass exodus brought prices right back down.
So where is the big money going now? Into defensive plays – the food, drug and health-care stocks – where there were no crowds at all. That, in part, explains their sudden popularity. Not to mention, if a deeper recession is upon us, then there is no better place to be. When consumers feel the pinch, they quickly trade down to Wal-Mart and McDonald’s. These are the companies that do well when deflation is the fear, and not the reflation that hedge funds were banking on before.
The bottom line? It got a bit too claustrophobic in the commodities, Cramer said, so investors took their money to food and drugs. He recommended that viewers do the same, specifically into this stock.
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