Mad Money

Distorted relationships triggering declines & confusion: Cramer

Declines in the market are not always as they appear. And if you don't understand what's actually happening, Jim Cramer fears you could stumble badly.

For example, take the weakness in Time Warner and CBS. "Both stocks have really gotten banged up, recently," Cramer said.

The declines would suggest that Time Warner and CBS have encountered some kind of business-related headwind.

"I've been asking everyone, is Time Warner going down because it was supposed to get a bigger dividend from Time Inc? Is CBS getting hit because ?"

However, after digging down in the market, Cramer thinks the declines are about something else altogether; hedge fund redemptions.

"Recently, a $7 billion hedge fund I have never even heard of, said it was going to return $2 billion to investors because of the volatility among its holdings. To me that's code for our positions went against us and we've been laid to waste, However, peel back the onion and you'll find CBS and Time Warner are the firm's first and third largest positions," Cramer said.

In other words, although you might be inclined to think bad fundamentals were driving the price action in Time Warner and CBS, instead, declines were due to niche issue involving a hedge fund.

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Cramer says the same kind of distorted relationship is driving shares of newly IPO'd companies lower, despite the promise of future revenues.

"When a company comes public not every share is free to trade. , typically for six months," Cramer said. As those shares come onto the market, they push down the stock's selling price, simply due to the laws of supply and demand.

"That's just the way it works," Cramer said. "Stocks are just like merchandise, no different from sweaters or coats or toilet paper. Merchants can charge more for any of those items when there is a scarcity. They have to discount when there's a plethora."

However, if you weren't aware of the lock-up phenomenon you may be inclined to think weakness was a reflection of the new company's business prospects. In this case it isn't.

Cramer feels the same distorted relationship phenomenon is at play in the bond market with prices rising and yields falling.

The knee-jerk reaction would suggest the lower rates are investors parking money in safe-haven Treasurys ahead of an expected slowdown.

However, dig down in the market and Cramer says you'll find "money coming from Russia. It suggests to me that money is going into Treasurys because of ," Cramer said, not the global economy.

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What's the bottom line?

All told, you may be inclined to think 1) weakness in CBS and Time Warner along with 2) declines in some newly IPO'd companies and 3) a flood of money going into bonds adds up to something rather ominous.

"The casual observer would conclude economic softness," Cramer said. "It would stand to reason."

But dig down into the market and you may conclude, as Cramer concludes, that economic softness has nothing to do with developments. "If you don't understand what's happening, these distorted relationships could easily lead you to the wrong conclusion."

Call Cramer: 1-800-743-CNBC

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