U.S. stocks closed sharply lower Monday, with the S&P 500 breaking below the closely-watched 1,340 level, as worries over Greece's potential exit from the eurozone and fears over a slowdown in China kept investors on edge. Interestingly enough, though, the European markets suffered much greater losses on average.
“Considering the outsized role Europe plays in our stock prices, why is it that we do better than they do almost every single session, even as they can and do drag us down almost daily?” said Jim Cramer on CNBC’s “Mad Money.”
After reflecting on this, Cramer found there are seven reasons that U.S. stocks might fall as European stocks do, but don’t stay down as European stocks do.
First, many U.S. companies have no European exposure. From retailers to restaurants and real investment trusts, many companies have nothing to do with Europe, yet watch as their stocks get taken down at the market’s open. These stocks spend the rest of the day trying to rebound, but still close down.
Second, the weakness in Europe is negatively affecting commodities around the world, including everything from oil to wheat to cotton. For companies that sell to Europe, a decline in European sales might hurt, but they are also benefitting from the expansion of gross margins that comes from a collapse in commodity prices. Earlier this year, many companies raised prices to keep up with rising commodity costs. Many of these companies are keeping the price increases, even though raw costs are falling.
Third, the U.S. consumer is in “remarkable shape,” Cramer said. It seems consumers are only continuing to spend. He thinks spending will improve, too, as the cost of gasoline comes down over the next few months to mirror the decline in crude prices.
Fourth, Cramer said that with the exception of “the horrid European banks” and a couple of liquor and handbag companies, Europe doesn’t create many great companies. The U.S., however, continues to create attractive growth companies that everybody wants a piece of, such as Facebook.
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Fifth, Cramer noted that many U.S. companies continue to catch takeover bids while that sort of thing rarely happens to European companies.
Sixth, JPMorgan Chase may have reported trading losses of what experts say could exceed $3 billion, but Cramer said that’s “merely a rounding error at that bank.”
“It won’t even be felt, even as it had to be acknowledged. I bet JPM has a near record quarter when everything sorts out,” Cramer said. “But that kind of loss would be enough to knock out some of those large European banks these days. Maybe even cause a run on them.”
Compared to European banks, Cramer said U.S. banks are incredibly well-capitalized. Some argue that U.S. banks need to be able to offer a full plate of derivatives to corporate clients or they will lose business, but Cramer disagrees. Cramer doesn’t really consider European banks competition for U.S. financial institutions because they are so weak right now.
Finally, Cramer said the U.S. is just coming out of the Great Recession. The U.S. housing market is turning around and unemployment has stabilized, he said. The budget deficit is horrendous, but isn’t producing higher interest rates. Also, the political environment is fairly stable with President Obama having presided over a massive increase in the Dow while Republican challenger Mitt Romney is a “stock market-loving business man.”
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Europe, on the other hand, is in disarray. Cramer called it a “totally discordant, dysfunctional system where the weakest states can call the tune and the political paralysis is palpable.” In many European countries, the banks are just now getting hit with foreclosures after housing prices have, in places like Ireland, fallen 60 percent. Meanwhile, its central banks is “toothless” and government is doing little to create jobs.
So what’s the bottom line?
“As much as the bears try to link Europe with the United States, we are blessed with many resources, lots of great companies, some tremendous balance sheets, relative political harmony and a system that is governable,” Cramer said. “Put simply: we are coming out of bad times. They are going into bad times.”
Read on for Cramer's Earnings-Loaded "Game Plan"
When this story was published, Cramer's charitable trust owned JPMorgan Chase.
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