Why Did Merrill – and Market – Rally?

It was a busy day for Merrill Lynch.

Analysts frowned on Merrill’s 380 million-share offering, taking the stock down in early trading Tuesday. Then the company’s move to clear toxic collateralized debt obligations off its books and a $500 million deal with bond insurer Security Capital Assurance sparked a rally in the banks, even sending MER almost $4 north of its offering price. And in the end the Dow closed up 266 points.

How did all this happen?

Cramer attributed it to three things:

Finally there was a bulk sale that put a price at which those bad bonds, the CDOs, could be sold. Granted, Merrill earned only 22 cents on the dollar, getting $6.7 billion from Lone Star Capital on what amounted to $30.6 billion in CDOs. But at least the market found a bottom. Wall Street needed that. Now Citigroup, Washington Mutual and Wachovia can follow Merrill’s lead.

There were rallies outside the banking sector, too. Colgate-Palmolive, usually a stock bought in anticipation of a recession, jumped five points on a strong quarterly report. And U.S. Steel, a stock often avoided when recession looms, jumped $20 on bigger-than-expected profits. These things don’t happen simultaneously in a bad market, Cramer said.

Lastly, there’s the continuing decline of oil prices. The cost per barrel dropped almost $3 Tuesday. Cramer’s predicting oil keeps falling until it reaches $110, putting prices at the pump at $3.50, he said. Even the retailers rallied on this news.

The rally isn’t over, either, Cramer said. And if we get a good employment number on Friday, this just might be the beginning.

Cramer also took a moment to add Merrill Lynch CEO John Thain to the Mad Money Wall of Shame. Since taking the helm at MER, Thain’s been less than straight with investors, Cramer said, and the CEO was just as untrustworthy while at NYSE Euronext.

Thain claimed that Merrill didn’t need capital, then held a multibillion-dollar offering today. He said he had reserves to cover those horrible CDOs, but sold them for 22 cents on the dollar. And back when he was running NYX, he said losing market share to the Nasdaq wasn’t an issue and would be reversed. Well, that never happened.

Luckily for Thain, the recent departures of Alcatel-Lucent’s Patricia Russo and Advanced Micro Devices’ Hector Ruiz leaves some room on the Wall. Perfect for someone like Thain who overpromises and underdelivers.

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