Oil Down, Banks Up?

The past two days have seemed like Bizarro World in the markets. Up is down, left is right, and two key sectors of the economy have seemingly reversed direction.

That’s right, oil and gas prices have declined, and the financials – at least some of them – have turned up. But why?

Cramer attributed the first trend, the drop in oil and gas prices, to the fact that the U.S. has cut back on usage. The cost just got too high for consumers to handle. Plus, there’s no room left for oil in our storage facilities, even worldwide, he said. Cramer had been calling a $150 per barrel target price, and it appears the level was $148. Oil's been down ever since it reached that mark.

“I don’t think we can go through it,” he told viewers Thursday. “It looks like we are not going to hit $5 gasoline. It means we are going to see gasoline go down.”

This bullish sign for the U.S. economy is what’s sending a lot of stocks higher, Cramer said, and he’s expecting this to continue.

At the same time, Washington has showed it will never again allow a run on a bank (like the one we saw on California’s IndyMac). Basically, the U.S. government’s position is that it “will print money like there’s no tomorrow rather than allow any big runs at our big banks,” Cramer said. And other names like Wells Fargo and JPMorgan Chase, which reported a good number Thursday, seem to be holding up (even though Merrill Lynchmight not be).

Then on top of this you have the Securities and Exchange Commission taking a stand against “naked short selling” so that hedge funds can’t bear raid stocks into oblivion. Now all those money managers with short positions have been forced to cover, causing, in a sense, a short squeeze. That allows the system “a chance to breathe,” Cramer said, “and that’s bullish, too.”

Here’s how Cramer sees this all playing out:

With JPMorgan, Wells Fargo, and even Comerica, doing better than we thought, banks should use these increases to raise capital. Those that do, survive.

The formation of a mortgage resolution trust should take the bad loans these banks hold off their books.

Today’s report that housing starts jumped about 9% was actually a bit misleading. The single-family home number was smaller than expected, and that’s where most of the market's supply bulge is. So this is actually good news because it means there’s potential for a bottom in home prices as supply tightens. And house-price depreciation is the big problem here.

“We get some federal relief for people who are at the risk of foreclosure,” Cramer said, “and we get that tightening supply, we will find a price where houses will bottom and the worst will be over.”

“That’s going to happen in 2009,” he continued. “I feel more strongly about that today than I have any day this year.”

As for oil, “$150 is too much,” Cramer said, and “we will not break that level” – at least not unless there’s a terrorist attack or a start of a new war. So the momentum in this commodity has been broken.

“Just like banks,” Cramer said, “once the momentum is broken, oil and gas have much further to fall.” He thinks the price per barrel could drop another $20, and natural gas another 10%. Oil and gas stocks could dip another 10% to 15%.

In the short term, though, the banks have risen too quickly, so Cramer recommended taking profits. The oils, he said, have dipped too much, so consider buying some.

The bottom line: These recent moves in crude prices and the financials doesn’t mean you buy all the banks and dump the oil stocks. In fact, Cramer suggested doing the opposite for a quick trade. He himself bought more natural-gas stock for his charitable trust at today’s closing bell. But the ultimate lesson, he said, is that it’s the diversified investor, who owns something financial and something oil, who does well.

“That guy or gal will be the winner when the smoke blows over,” Cramer said, “and the market gets back on its feet longer term, which it always does.”

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