Mad Money

The Doom-and-Gloom Scenario

Cramer likes to say there’s always a bull market somewhere, but tonight he played the role of the ultimate bear.

Market Mess: Causes

The goal was to give Home Gamers the worst-case scenario for the markets so they could clear their portfolios of an unnecessary risk. There’s no guarantee that things could get this bad, but it is a possibility.

About a third of homebuilders could go under, Cramer said. South Florida, Phoenix and all of California are disaster markets. Companies like Centex, Toll Brothers, DR Horton and Pulte can’t shrink or sell land fast enough, but they’re still building homes. MDC Holdings is the only one Cramer said isn’t a total disaster. He thinks the Philly Home Index might be due for a bounce, but it’s not done going down.

AmericanHome, Novastar and CountrywideFinancial are some of the few publicly traded mortgage brokers are still standing. Countrywide is the poster child for everything that has gone wrong, but Cramer gives it credit for recognizing the problem and laying out a worst-case scenario of its own when it reported last week.

Countrywide said that all kinds of loans are defaulting – not just subprime.  So for that reason, Cramer said that there’s a chance 50% of all the loans used to buy 7 million homes in 2006 could default. Again, this is just a worst-case scenario, but it’s a possibility for which investors should be prepared.

Banks are wide open to these defaults, and if 50% of loans go belly up, Bank of America and Washington Mutual could be devastated, Cramer said. That’s why people don’t trust their high yields or their recently raised dividends. In fact, BAC and WM stock is trading as if the dividends will be cut, maybe even eliminated.

All those mortgages were packaged into bonds, and now those bonds are generally seen as worthless, Cramer said. The Bear Stearns hedge funds that failed owned a lot of these. Worst-case scenario: The banks keep going lower.

According to Cramer, the trickle-down effect could reach every company that needs a loan: GM, Ford, Chrysler, DR Horton, Pulte. People looking to sell their homes could lose as much as 20% of their equity. Every deal that needs financing could fail to get it. Consumers might stop eating out and shopping, then restaurants and retail stores will tumble. And on and on and on…

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