Credit Markets Haunt Stocks

As much as there’s reason to cheer lower gas prices and declining mortgage rates, credit troubles still weigh heavily on the overall market, Cramer said Monday. And that’s why the major indices continue to drop despite this apparent good news.

Credit, which Cramer called the market’s “dark side of the road” right now, is the unseen force behind all the bad action lately. You might think, Aren’t things better? I’m paying less than $2 at the pump and I’m about to refinance my mortgage. And the answer is: No, they’re not.

Just look at the statements made on a recent Goldman Sachs conference call. Chief Financial Officer David Viniar told investors that the value of investment grade bonds fell so fast over the past three months that is implies one in five will default. He also said that the commercial real estate index is signaling that 60% of commercial mortgage will default before maturity. And lastly, Viniar announced that credit indices overall have fallen 34% in just the fourth quarter.

If this is the current credit environment, then is it any surprise that banks won’t lend? Why would they if they’re far from guaranteed to get their money back? What’s really alarming is that this is happening despite all the billions of dollars in government handouts over the past couple of months.

And that’s just the commercial side. Think about the consumer. Unemployment’s on the rise, which means that all the bonds backed by credit cards and auto and student loans could collapse. And Cramer doubted that new loans of any kind would be issued. Sure, mortgage rates are falling, but who will actually qualify? It would take a huge intervention on behalf of the government, meaning Washington backs up all this debt, before banks open their vaults to the average American.

Here’s how Cramer sees this unfolding:

Retail banks like Bank of America and JPMorgan Chase take a hit – unless President-Elect Barack Obame’s stimulus plan is so large it slows the unemployment trend. Banks continue to hoard their cash because they need it to just stay in business. Without that credit, businesses can’t function, further damaging the markets. And no matter what kind of good news we get, Wall Street will most likely continue to limp along.

The solution? Cramer wants to see a TARP for Main Street. Giving to the banks had its place, but if there’s no one to lend to, he said, those countless billions in handouts aren’t worth much. Cramer also said the government should, in the very least, guarantee more bank debt and offer cash to banks at a lower cost. Make no mistake – regardless of how much all the major financials have received so far, they still need more money.

The alternative is, of course, the continued deterioration of the credit markets. And if that’s the case, Cramer said, if the government doesn’t get involved, there will be no sustained long-term rally in the stock market.

Jim's charitable trust owns Goldman Sachs and JPMorgan Chase.

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