How Cramer Knew

Who knows what thoughts lurk in the mind of Jim Cramer?

The Shadow knows, but I don't have Alec Baldwin on hand to check with him. That said, if you're curious about how Jim Cramer operates, and since you're reading this blog I'd bet you are, I can give you an account of how he does it, or at least how it looks when you're on the outside looking in. This isn't a puff piece meant to suck up to my boss-slash-uncle, by the way, as one of my readers suggested was the purpose of this entire blog. I just want to pull back the curtain and give you a glimpse at how Jim came up with an idea that we then turned into a multi-part story.

I'm talking about the genesis of our "happier days could be here again" series about companies that should produce better earnings than the Street is expecting because oil, natural gas, gasoline and other commodity prices are coming down. In its first incarnation, Jim recommended Panera Bread, after interviewing its CEO, because of lower wheat prices and the beginning of a political push-back on the ethanol mandate, which is the largest single driver of food inflation, that's since stalled. So far, we've recommended Disney, Tupperware, UPS, and Kimberly-Clark in addition to Panera as part of this new theme. Those are the sausages, let's take a look at the sausage factory.

Last Tuesday, July 22, we weren't thinking about discovering a new theme or starting a new multi-part series at all. We needed to come up with a story for that day's show. So Jim calls me into his office at about 12:45, and "says" (I try to take notes, but I don't know shorthand. And there's no way I can put down everything he says on paper. This is at best a rough paraphrase), "Here's what we do: Last night, after Texas Instruments and American Express and Apple and Sandisk disappointed, everyone wanted to kill themselves because they all thought the market would get murdered today off of those earnings. Now the question we have to answer is why that didn't happen. Why didn't the market get killed? Why is it that the Dow bounced back from being down 180 points and moved back into positive territory when yesterday night everyone knew it was going to go down and stay down? No one can explain this. No one's trying to solve the mystery. That's our story."

I mumble some inarticulate words of enthusiastic agreement--you don't care about my part in this conversation, I'm as much a part of the audience as you are. Then Jim sits down and turns to his computer and asks, "Where do you think the S&P was the last time oil was at $126?" He looks it up and writes down on the piece of paper I'm looking at right now, "126/1,403." Then he says, "And where was the S&P when natural gas was last at $9?" Then he writes down the next ratio, "9/1,322." At the time the S&P was at 1,258.

"It's oil, oil controls this market. Oil and gas, which make up 12% of the S&P 500, control for the other 88% excluding the financials, which we don't have to worry about now that the systemic risk has been taken out of the system. Oil controlled for the first half of the year on the way up, and it still does now on the way down," he declares while wagging his index finger in the air.

He tells me to do the math and figure out how much upside the market has, given these ratios and then explains what became the heart of our segment: "Everybody's looking at these bad earnings with a bear market rubric, thinking they should have crushed the market, but they're missing the big picture. Earnings aren't driving this market, oil is. The reason we didn't crash today is that the price of oil says this market needs to go higher, these companies' earnings don't matter when lower oil prices are making the bull case for so many different groups. It's simple math." All of this took place in under 10 minutes easily.

After that, the rest was talking details that you heard if you watched the show last Tuesday. We took another ratio, the average price of gasoline when oil was at 148, $4.11 a gallon, to figure out that gas should fall to $3.50 with oil at $126, which is where Jim's idea for the "better days could be here again" came from.

You have to remember the context of this conversation. At the time nobody could figure out why the market hadn't been killed. Most companies and analysts were still predicting high oil and gas prices going forward, and many still are. Earlier in the day I'd been talking to Jim about what he brings to the table for investors while we were talking about what we should spend more time focusing the show on, and I'd said the most vital thing he can do is teach people what pieces of information matter and what don't in any given market. Then he turns around and does exactly that, figuring it all out in a matter of minutes.

Later that day I asked Jim if he was taking a shot in the dark when he looked up where the S&P 500 was the last time oil and natural gas were that cheap, or if he knew the kind of answers he'd get before he even voiced the question. I'll give you the same answer he gave me, although I can't duplicate his facial expression that let me know he'd been almost completely sure before he even looked up the numbers, even as he asked sardonically, "What do you think?"

Ed Note: A previous version of this post was edited because Cramer didn't like how it read.

Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Rich and Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like.

Mason has also had a fruitful relationship with Jim Cramer as his nephew for the last 23 years and will hopefully continue to hold that position for many more as long as he doesn't do anything to get himself kicked out of the family.

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