Cramer: Why You Can’t Trust This Market Rally

The Dow’s end-of-day rally recaptured all but seven of the 245 points the index had lost intraday Thursday, and the Nasdaq and S&P 500 both finished in the green. Apparently, President Obama’s stimulus package and a tech rally pushed stocks higher. Cramer thinks the trend will continue Friday thanks to news that Washington might subsidize some mortgages, but don’t expect the action to continue much beyond that. Those catalysts aren’t real, he said, and that’s why this market is still treacherous.

Let’s break those two market drivers down and get a better look at them. The New York Times described the $789 billion bill’s passing as a “quick, sweet victory” for Obama. But as Cramer pointed out, the stimulus doesn’t solve our biggest problems: the banking crisis, unemployment and housing. Instead Washington put forward tax cuts and state handouts.

That’s unfortunate because the commercial real estate market is in trouble, and Cramer doubts if the related mortgages that come due this year will roll over, even if buildings are fully rented. Most likely, there will be problems with 2-28 mortgage rollovers as well. Remember, these loans offer fixed teaser rates for two years to less credit-worthy borrowers, and then an adjustable rate for the next 28 years. That first two-year period gives these borrowers a chance to boost their credit score in hopes of refinancing before the adjustable rate kicks in. But Cramer said the Alt-A mortgages, which fall in between prime and subprime loans, won’t be able to refinance. And that’s going to make life very difficult for those borrowers.

According to RealtyTrac, which Cramer called the definitive organization on real estate numbers, the January drop in foreclosures was temporary, and only due to Fannie Mae and Freddie Mac’s deferred foreclosures. The real foreclosure rate is actually much higher and on the rise. Yet Congress’ solution is to offer only a $500 tax credit to first-time buyers. We better get the job creation we were promised, Cramer said, or the major banks’ mortgage divisions could trigger large-scale failures.

The tech sector’s just as bad. A rally that started with IBM’s better-than-expected quarter grew when the semiconductors ramped up, then really took off with the surges in Research in Motion and Apple. Amazon’s great earnings report kept things roll, as did Google’s 20% jump. Even a grim outlook from Cisco Systems couldn’t hurt the Nasdaq – the index went higher anyway.

But it’s all a big farce, Cramer said, because smartphones are the only real growth in this sector, and Apple and Research in Motion have just about maxed out. Just look at RIMM’s earnings pre-announcement on Wednesday. Plus, Amazon and Google are just too expensive, semiconductors aren’t an investable industry right now, neither are PCs and cell phones, and Cramer takes Cisco CEO John Chambers at his word: Things are bad. Money managers may want these stocks to stay up, but the fundamentals don’t justify the move.

So stick with recession-resistant stocks like Coco-Cola and accidental high-yielders like VF Corp. Investors still want to play defense in this market.

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