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Cramer: Don’t Blame Europe for Wall Street Losses

U.S. stocks ended in the red on Monday, but “Mad Money” host Jim Cramer said it had little to do with Europe’s sovereign debt crisis and more to do with heavy betting on S&P futures.

To make his case, Cramer pointed to Ross Stores. As an off-price retailer, Cramer said the Pleasanton, Calif.-based company benefits from strong demand for discount products and consistently reports solid numbers. Ross Stores operates more than 1,000 stores across the U.S., but still has lots of opportunity to expand in fast-growing markets, he added. It has zero exposure to Europe, too.

Nevertheless, Cramer said Ross Stores stock fell Monday simply because it trades on the S&P 500 index.

“There are huge fundsthat do nothing but trade S&P 500 futures,” Cramer explained. “When the futures are down, everything gets taken down with them except for stocks where there’s specific good news and Ross didn’t have any news today.”

The market didn’t always trade this way, though. Prior to 1983, stock futures didn’t exist. Many companies resisted the creation of stock futures, too, because they feared stocks would be controlled by the futures rather than the performance of the company. As it turned out, that’s exactly what happened, but Cramer said nobody cared because investors saw S&P futures as a great way to hedge. Instead of dumping all stocks on fears of an economic slowdown, investors could now sell a future and hold onto their stocks.

By the late 1980s, futures became an “offensive weapon.” To get short quickly, an investors could just sell a future.

“You wanted to get really negative? You shorted the futures over time and then you came in with guns blazing and knocked them down, perhaps based on a rumor and then were able to cover and profit from the short sale,” Cramer said. “That kind of behavior became common and it was a proximate cause of so much of what went wrong in the recent crisis.”

Large hedge funds, which command billions of dollars, might not even own many individual stocks because they need to own a huge block of shares in order to turn a profit. So many hedge funds make bets on the market, Cramer said, often making a linkage to Europe. After all, the market is sensitive to Europe because many U.S. companies that trade on the S&P do business there. Plus, the financials are believed to have considerable European exposure and are the largest component of the S&P. So when selling a future, the hedge funds are making a two-fold bet.

“Of course, it isn’t really about Europe and an S&P component like Ross Stores definitely isn't,” Cramer argued. “Ross should be bought on a futures related dip, not sold. So should a lot of the regional banks that have nothing to do with Europe. That’s what should happen.”

The problem is that stocks are hardly ever in line with the underlying businesses they are supposed to track, Cramer said. After all, the hedge funds that influence much of the day’s action don’t think about what would happen to a stock like Ross Stores when the futures put pressure on the entire market. The hedge funds only care about turning a profit, Cramer said.

So what’s an investor to do? Cramer recommends investing in high quality growth stocks that have nothing to do with Europe. Read on for Cramer’s Ultimate Growth Stocks for 2012.

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