Game Plan: The Crash of '87 Scenario

The Dow lost 2,000 points this week, making it the worst sell-off since 1933, Cramer said. He doesn’t think we’re done, though.

Today’s late-day rally brought us too far too fast, he said, and bottoms rarely happen on Fridays anyway. Main Street isn’t paying attention, they find out what happened over the weekend, and then Monday they start to sell.

Keep this in mind as next week starts. Cramer can’t decide if this market is closer to 1987 or 1929, but he’s pretty sure bad news from Morgan Stanley and lack of good news from the world’s industrialized nations could cause a sizable drop in the markets on Monday and Tuesday. The Dow could go as low as 5,886, he said.

That’s what happened during the crash of 1987: The Dow lost 508 points from Friday’s close to the session-ending bell on Black Monday. Then Terrible Tuesday saw an intraday low 339 points below that before the market turned up. If this is how the present market plays out, Cramer wants investors to use a quarter of the cash he’s been urging them to raise each day to buy certain stocks on weakness. He thinks we might have come down enough to put some money back to work.

Why risk it? Because even people who bought stocks on the Friday before Black Monday broke even after a year. And those that bought during the lows of Monday and Tuesday saw some terrific gains 12 months later. Example: Kellogg dropped to $9.70 from $16 on Black Monday, then climbed back to $16 a year later. So it makes sense that investors would want to buy stocks if the market dips, at least if it reacts the same as ’87.

Not that the market then and now are perfect corollaries. Present day is actually worse, Cramer said. Back then the fundamentals of the economy were strong, and we weren’t headed into a recession. Stocks were expensive in ’87, too. The average S&P 500 stock was selling at 29 times earnings. That number now? 11. (Not that cheap stocks are bad – that’s one good point about this market – but today’s earnings might not mean jack if we end up with 10% unemployment.) Insolvent banks, troubles with GM and Ford, and bailouts for Fannie, Freddie, AIG weren’t issues either.

So what should you consider buying? Cramer said to look for companies like KBR that are trading at about their cash. KBR, at $15, has $9 per share of cash.

Also, consider food companies with large cash reserves and good dividends. Think Kraft and Heinz. This is Cramer’s “eat ‘em, drink ‘em, smoke ‘em, drug ‘em” thesis. If a company makes any related products, then their stocks might be in play. So Coca-Cola, Merck and Altria, with its 6% yield, also work here.

Check out cyclical stocks with high dividends yields, like Nucor and Freeport-McMoRan, too. But keep any holdings small because when times get really rough, these companies will have to dig deep to make those dividend payments.

In oil, Cramer said he liked Kinder Morgan Energy Partners, which pays out 9%, and BP. A word of caution, though: He thinks oil could drop to $60 in a recession, and as low as $40 in a depression.

Discount retailers and dollar stores might be a good place to invest. Do some homework on the usual suspects.

If you feel compelled to buy a financial, Cramer would only recommend US Bancorp because of its great balance sheet and big dividend.

And lastly, utilities like Duke Energy and ConEd can be bought.

Of course, this strategy works only if the market acts as it did in 1987. We could see a repeat of 1929, and that would be much, much worse. Remember how the crash of ’87 evened out a year later? It took 25 years to get back to the pre-crash levels of 1929. In fact, it took years just to find a bottom. To read more about that doomsday scenario, click here.

Jim's charitable trust owns Freeport-McMoRan.

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