Bonds: The Big Show

Stocks operate in the market’s farm leagues, Cramer said Wednesday. Bonds, on the other hand, play in the majors.

What did he mean by this? Put simply, there are greater forces at work than mere equities. Their rise and fall depends on the strength of fixed income. Credit comes first. The economy won’t move without it. The more debt there is flowing through the system, the more robust that system is. So Cramer starts to get more bullish when he sees convertible bond issuance, hedge funds lining up to buy toxic assets and an increase in the purchase of asset-backed paper.

The hedge funds specifically are a good example of rising credit availability. That’s because these funds never buy fixed-income securities with only their cash on hand. They borrow big money to produce even bigger returns. The problem, though, is that tight credit markets have made it impossible to do this. So the fact that Federal Reserve Chairman Ben Bernanke has stepped up to facilitate this market, using government funds to entice the hedgies to consider buying these assets, is a very positive sign.

Once you see that lending happening, Cramer said, and you see more and more asset-backed paper being bought, that means the fixed-income markets are showing strength again. It’s like a company reporting better-than-expected earnings. The trend boosts confidence all around, which leads to more lending and car loans and mortgages and so on. This last piece is especially important because the increased mortgages lead to price stabilization, something that’s crucial to home-price stabilization. And we need that if we’re ever going to see a bottom in housing.

All of this action in the credit markets then leads to companies beating their earnings estimates three to six months down the line, Cramer said. He wanted viewers focused on environment moving forward rather than what looks like poor company performance right now. He doubted we could see the kind of credit loosening that’s happening without it translated into good news for stocks down the line.

So forget about first-quarter earnings, Cramer said. Look instead at the credit markets and housing. They are the keys to this market, and they’re saying that the situation is getting much better.

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