In this new investing world Cramer looks at each major stock sector and explains what kind of Obama discount or premium it gets, where earnings take a back seat to populist politics. Cramer said investors need to review their portfolio ahead of Wednesday’s State of the Union address to figure out just how much risk they are taking on, perhaps without even knowing it. Here’s how:
first, as of Friday’s close, discretionary goods made up 9.55% of the S&P 500. There is not much pressure from the Obama administration in the discretionary sector, except the need to raise taxes and the President’s desire to raise them even more. For that reason Cramer is shaving 5% off the value of stocks in this sector. Consumer spending is two-thirds of the economy, and while discretionary stocks aren’t the worst hit by this investing paradigm shift, they are worse off now than they were two weeks ago.
How about staples, representing 11.47% of the S&P 500? There’s really no pressure on this group at all. Cramer thinks the staples deserve a 5% premium to where they would sell in a world where a Democrat, rather than a Republican, won the special election in Massachusetts, and there had been no populist Presidential backlash. “That’s right," Cramer said, "these stocks, which do better when the economy slows down, are the best area of all.”
Cramer said investors want stocks with no near-term earnings risk, ones that have already reported good numbers like McDonald’s and Kimberly-Clark. KMB has a 4% dividend yield and may “leap to the top,” Cramer said, because it may raise its dividend by ten cents. And with MCD, Cramer can’t rule out a potential tax on junk food.
Next up, energy at 11.52% of the S&P 500 is definitely in Obama’s crosshairs. Cramer's trimming 10% off this sector. Also, Cramer thinks after the administration finishes with the banks, this group is next to be targeted and suspects that President Obama will demand much more from the oil companies that drill here. This could include trying to ban a significant amount of drilling to protect water, game, etc… Cramer thinks ExxonMobilewill be the next Goldman Sachs Group . For that reason Cramer said he wouldn’t own Exxon and would sell XTO Energy just in case Obama backs a ban on natural gas drilling using revolutionary hydraulic fracking. The reason is because Exxon has the right to walk away from its XTO acquisition, in the event of a fracking ban.
What about financials, at 14.47% of the S&P 500? No sector is higher up on the Obama’s enemies' list than banks. “That means the group deserves a 15% haircut, if not a buzz cut with a rust k-bar,” Cramer said. He also warned investors to be careful with JPMorgan Chase since it was historically exempt from Glass-Steagall, which separated investment banking from deposit taking. Cramer said Goldman Sachs has already been crushed, but there is likely more pain ahead.
Healthcare represents 13.1% of the S&P 500 and is another sector that Obama has on his radar. For this reason this sector gets a 10% discount in this new prism, down from 15% because of the end of the Democratic supermajority. Since Martha Coakley lost, Cramer thinks this is a difficult group. However, the market knew that was coming so it jacked these stocks up, and that is why they have more risk now. Cramer thinks investors should focus on Covidien because they just delivered a “monster beat” and have no earnings risk. Plus, Covidien’s medical equipment was never targeted by the President.
What about the industrials which make up 10.51% of the S&P 500? Cramer thinks these could get hurt by a possible Obama related economic slowdown. This group gets a 10% haircut under the new framework, even though these companies often are not hostages to the United States. Many industrials have huge exposure to China, and China is intentionally trying to slowdown its economy. Cramer said that even though Obama is not intentionally slowing down our economy, it has the same effect. Cramer is worried about the industrials and thinks the company to fall back on is Johnson Controls. JCI just reported and is levered to an industry that is coming back and coming back fast. The company reported a strong quarter because of huge exposure to a turnaround in autos since it makes batteries and seating.
Cramer thinks tech is similar to the industrials, getting the same 10% haircut. Even though Obama’s not anti-tech, Cramer worries about a worldwide slowdown caused by his “anti-capital” stance. Cramer is sticking with Appleregardless of the reaction to its earnings tonight because it has the best multi-year growth path, not the best multi-day growth path. Plus, it’s tough to tax the mobile Internet tsunami.
Material stocks, at 3.51% of the S&P 500? Cramer thinks this group has more to fear from China than Obama, so it’s neutral to Democratic politics.
What about telecom, representing 2.96% of the S&P? Give this group a 5% Obama discount as it could be the subject of Justice Department investigations simply because no one likes the phone company.
Finally, the utilities representing 3.64% of the S&P? Cramer said cap and trade is next, giving this group a 5% discount. One of the few utilities that doesn’t have a problem is Con Edison because it is just a provider, but Cramer said to sell this whole sector. The reason is that utilities are a big target like they were in the 30’s, except this time the case can be made that they are poisoning the air, the water and the people.
Bottom line: investors need to be aware of the new atmosphere before buying. This reduces the price for the vast majority of stocks. Only consumer staples are worth more, post the Massachusettes special election.
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