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Cramer: The Money Manager’s Dilemma (and How It Affects You)

Friday, 24 Jul 2009 | 8:17 PM ET

Most people would expect a terrible trading session after three bellwether companies report worse-than-expected quarters, but that’s not what happened. Instead of selling off on Friday, the Dow finished 24 points higher. Even the Nasdaq, home index to two of the firms in question, ended its 12-day run of positive closes by slipping a mere eight points. What’s going on? Cramer offered his explanation for the market’s seemingly contrary behavior.

Fear & Loathing?
Why the market didn't hold up today, with Mad Money host Jim Cramer.

“Fear,” the Mad Money host said.

Specifically, Cramer was talking about the worry among money managers who have missed the latest market rally. Last winter they may have been praised for their large cash positions, which helped them avoid a terrible decline in stocks, but now they’ve been left behind as investors profit off the rebound. These heads of funds, who buy and sell at such volume that they literally set share prices, are so underexposed to stocks right now that they can’t afford to lose any of their holdings, even if Microsoft , Amazon.com and American Express disappoint Wall Street.

As Cramer said, “There are simply too many money managers out there who cannot afford to sell.”

Understandably, these guys fear for their jobs. There’s little doubt their clients are wondering why best friends and neighbors are locking in gains while they watch the recovery pass them by. So, in addition to holding on to the stocks they have, money managers are hitting the airwaves with the most bearish take on the market they can muster. The strategy is to scare enough people into selling so that share prices come down and the managers get a better entry point.

That’s why much of Friday’s pre-open chatter seemed to predict a virtual bloodbath in stocks. The big money couldn’t part with their own shares, so they hoped to get others to dump and run. But with so many funds in buy mode right now, the selling never happened.

Now, don’t get this confused with any kind of resilience, Cramer said. Stocks and their underlying companies are just as shaky as they’ve been lately. The only reason they appear solid is because money managers desperate to buy are propping them up. It’s not about the “fundamentals of the companies” so much as the “fundamentals of the money management business, which right now are only good for managers who own the most stock and the least cash.”

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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