Mad Money w/ Jim Cramer 12/27/24

Summary

Mad Money w/ Jim Cramer – Episode Summary (12/27/24)

Introduction

In the December 27, 2024 episode of CNBC's Mad Money with Jim Cramer, host Jim Cramer delves deep into the mechanics of stock market sell-offs, drawing lessons from historical crashes to equip investors with strategies for navigating turbulent times. The episode is structured around an in-depth analysis of past market downturns, practical investment advice, and an interactive Q&A segment with listeners.

Historical Market Crashes: Black Monday (1987) and the Financial Crisis (2007-2009)

Cramer begins by recounting two of the most significant market crashes he has witnessed: the one-day crash of 1987 and the prolonged financial crisis of 2007-2009.

• Black Monday (1987): On October 19, 1987, the Dow Jones Industrial Average plummeted over 22% in a single day. Cramer shares his personal experience, noting, “Black Monday hit fast and hit hard. It felt there were no buyers to be found” (04:15). He explains the role of portfolio insurance and the misuse of futures trading by investment firms, which exacerbated the market decline. The intervention by Fed Chairman Alan Greenspan, promising liquidity to stabilize the market, led to a swift recovery, though it took until mid-1989 for the Dow to return to pre-crash levels.

• The Financial Crisis (2007-2009): Contrasting the abruptness of Black Monday, the financial crisis was a prolonged bear market that lasted six years. Cramer emphasizes the systemic risk involved, stating, “The financial crisis gave us a once in a lifetime bear market with true systemic risk” (21:16). He criticizes the Federal Reserve’s delayed response and highlights the catastrophic impact on investors who lost faith in the stock market.

Flash Crashes: 2010 and 2015

Cramer proceeds to compare Black Monday and the financial crisis with the flash crashes of 2010 and 2015, highlighting their mechanical nature and the role of high-frequency trading.

• 2010 Flash Crash: Occurring on May 6, 2010, the Dow fell nearly 1,000 points within 36 minutes due to a large erroneous sell order and the overwhelming impact of futures trading (10:00). Cramer refers to it as a “phony sell-off” detached from economic fundamentals, presenting a buying opportunity once the market stabilized.

• 2015 Flash Crash: On August 24, 2015, the Dow dropped about 1,000 points at market open amidst fears of the Federal Reserve raising interest rates and concerns over the Chinese market (32:30). Similar to the 2010 event, the decline was driven by automated trading and margin-induced selling, rather than any underlying economic distress.

Cramer underscores that these flash crashes were driven by market mechanics rather than economic fundamentals, allowing informed investors to capitalize on the temporary dislocations.

Comparing Different Types of Sell-offs

Cramer distinguishes between sell-offs caused by economic downturns and those resulting from mechanical failures within the market.

• Economic-Driven Sell-offs: These involve genuine economic distress, such as plummeting employment or failing major financial institutions. Cramer notes, “If you have a decline that could be joined at the hip with the real economy, one that has true systemic risk” (21:16). Such downturns are rare and require cautious investment strategies.

• Mechanical Sell-offs: Triggered by market dysfunctions like automated trading errors or excessive margin borrowing, these sell-offs are often devoid of economic justification. Cramer advises that recognizing the cause is crucial for identifying investment opportunities.

Practical Advice for Investors During Sell-offs

Cramer provides actionable strategies for investors to navigate different types of market declines:

1. Accidental High Yielders: Look for solid companies with robust balance sheets whose stock prices have fallen, resulting in unusually high dividend yields. These represent potential buying opportunities (32:30).

   “What I want are very solid companies with good balance sheets to pay dividends that we reinvest constantly. That is nirvana for me.” – Jim Cramer (10:15)

2. Using Limit Orders: During a crash, use limit orders instead of market orders to avoid unfavorable prices.

   “Don't use market orders because you might end up getting terrible prices.” – Jim Cramer (32:30)

3. Avoid High-Yield Dividend Stocks During Fed Tightening: When the Federal Reserve raises interest rates, high-yield dividend stocks become less attractive compared to bonds. Instead, focus on companies that are resilient regardless of economic conditions.

   “Please be careful of these dividend stocks as safe havens when you're dealing with a sell-off caused by the Fed.” – Jim Cramer (36:13)

4. Identify Margin-Induced Declines: Recognize when sell-offs are driven by margin calls, typically between 1 and 2 PM, and target safety stocks like healthcare or secular growth plays after these periods (36:13).

5. Political and International Sell-offs: Assess whether international or political events genuinely impact your portfolio's American stocks. Often, these sell-offs are overblown and don’t warrant selling if your investments are fundamentally strong.

   “Ask yourself, do any of these woes truly impact the stocks of the American companies in your portfolio?” – Jim Cramer (32:30)

Lightning Round: Listener Questions and Cramer's Insights

The latter part of the episode features an interactive Q&A segment where Cramer addresses direct questions from listeners:

1. Roth IRAs for Grandchildren (10:00)

   • A listener asks about opening non-deductible Roth IRAs for grandchildren. Cramer advises a growth fund approach for young investors, emphasizing higher risk tolerance to maximize long-term gains.

     “I want you to be in growth, growth for growth. Because they're young, you can switch the index in the 30s.” – Jim Cramer (10:15)

2. Buying Stocks Post-Earnings Dip (10:37)

   • A caller inquires about purchasing a stock after it reports good earnings but the market buys it down. Cramer recommends buying at your desired price incrementally rather than all at once to mitigate risk.

     “You buy a little bit at the beginning and then like we teach at the club, you buy it on the way down.” – Jim Cramer (11:03)

3. High-Yield Dividend Stocks as Investment (28:30)

   • A listener from Washington asks about the risks and benefits of high-yield dividend stocks. Cramer emphasizes selecting solid companies with sustainable dividends rather than chasing excessively high yields.

     “What I want are very solid companies with good balance sheets to pay dividends that we reinvest constantly.” – Jim Cramer (28:30)

4. Selling Stocks After Averaging Down (44:03)

   • Michelle from California questions when to sell stocks that have been in the red for years despite averaging down. Cramer advises holding onto them if the outlook remains strong, as the future potential outweighs temporary setbacks.

     “If the outlook is still strong, you want to hold on.” – Jim Cramer (44:03)

Conclusion and Final Takeaways

Wrapping up the episode, Cramer reiterates the importance of discerning the underlying causes of market declines to make informed investment decisions. He encourages investors to remain disciplined, avoid panic selling, and seize opportunities presented by mechanical sell-offs.

“Unless they involve systemic risk, which is increasingly rare like in 2007, they're going to prove to be buying opportunities long term.” – Jim Cramer (36:13)

Cramer also highlights the continuous nature of market fluctuations, reassuring listeners that with the right strategies, they can navigate both good and bad market days effectively.

Notable Quotes

• “Tough days do not last forever, but when they come along you need to know how to respond.” (02:20)
• “All happy rallies are alike. Each sell-off is unhappy in its own way.” (04:00)
• “It's better to be lucky than good. But discipline can help maximize your luck.” (09:00)
• “Fear can't be legislated or regulated out of the market. It will always be there.” (21:16)
• “Make sure your stocks have nothing to do with the political fray if you want to avoid unnecessary risk.” (36:13)

Final Thoughts

Jim Cramer's comprehensive analysis in this episode serves as a valuable guide for investors facing market uncertainties. By understanding the distinct causes behind sell-offs and implementing disciplined investment strategies, listeners are better equipped to protect and grow their investments even in volatile times.

Transcript

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[Jim Cramer]

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[American Express Representative]

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[Caller]

Distributor.

[Jim Cramer]

My mission is simple to make you money. I'm here to level the playing field for all investors. There's always a bull market somewhere and I promise to help you find it. Mad Money starts now. Hey, I'm Kramer. Welcome to Mad Money. Welcome to Kramerica. I don't make friends. I'm just trying to make a little money. My job is not just sitting entertainment to teach. And I'm telling do a lot of teaching tonight. So call me 1-800-7-for3 CBC or tweet me at Jim Cramer. Tough days do not last forever, but when they come along you need to know how to respond. You need a game plan ready so you can figure out what kind of sell off we're dealing with and then react appropriately because the early days of decline are never easy to navigate. You need all the help you can get to borrow a line from Tolstoy's fantastic Anacrena. All happy rallies are alike. Each sell off is unhappy in its own way. It's true. Bull markets and stocks higher and everyone thinks they're genius participating because it seems so darn easy. Same every time, but big declines much harder. They could be the start of a bear market or maybe something worse. Or they might actually be just a viable glitch. That's why tonight we're turning to history to Illustrate some of the common qualities of sell offs. So you know what to do the next time the market has an inevitable moment of weakness. Now really, There only been two truly horrifying sell offs since I started investing over four decades ago. The one day crash of 1987 and the rolling crash of 2007. 2009, that was the financial crisis. Do you even the COVID crash when the S and P lost SB 500 lost 35% of its value in just over a month. That wasn't nearly as bad as these two, especially when you remember that the market started rebounding almost immediately. So let's deal with the two big ones head on because they make for great examples. 1987 and the financial crisis are actually polar opposites, although the percentage declines really pretty similar. On October 19, 1987, also known as Black Monday, the Dow Jones industrial average fell 508 points or more than 22% in a single session. I was trading that day and even previous week had been one of the worst weeks in market history. Black Black Monday hit fast and hit hit hard. It felt there were no buyers to be found. From Dow 2246 where the crash started, to Dow 1738 where at last it ended. That day it kept tumbling right into the close. I remember thinking saved by the bell. Except it felt like there wasn't that much money left to be saved. But most people don't remember that. The week before was horrendous too. The Dow had already plunged from 2482 to 2246. That's nearly a 10% decline. That harsh pullback encouraged bargain hunters, intrepid souls who thought they could flip Monday morning into some strength. You bought Friday, flipped it on Monday, except the strength never showed up and they got badly burned. In fact, we just continued the next day. That day became known as Turbo Tuesday where the Dow kind of just broke down entirely. The market simply stopped functioning. But you know what? I was there and I was actually able to calculate that bottom. The bottom turned out to be about Dow 1400. That was down another 122 points or about 7% from where we closed on Black Monday. At the end of the day it was all just. I pieced them together one by one and people didn't think it ever went down below Dow 1600. But they were wrong. Then Fed Chairman Alan Greenspan stopped the decline in his tracks when he said he'd provide all the liquidity necessary to stabilize the market. Now I still remember that green line when it came over your screen. He enlisted Multiple firms around Wall street to help put in the bottom. And the market staged a remarkable two day rally. That it took the Dow up more than 400 points from its lows. It seemed pretty unbelievable at the time. The effects of the crash lasted for just three months when we had a retest that held. But do you know that it took until mid-1989 for the averages to return to where they were trading before this big breakdown. The bear market that began in October of 2007 was a totally different animal. Dow fell from 14,001, 198, 1198. So it's 14,000. Remember the other ones in 2000? 14,000. And it didn't bottom until March 6th of 2009 when it landed at a staggering 6,470. We didn't return to that how 2007 level until March of 2013. Why did one sell off end so quickly while the other took six weeks, six years to unwind? Well, that's the question that defines the two extremes of unhappy sell offs. See Black Monday was a mechanical sell off. The first one I can remember where the averages melted down because of pure market dysfunction. It's instructive to unpack Black Monday because the way it played out was reminiscent of two other crashes. The flash crash of 2010 and its doppelganger in 2015. Both times when the market simply failed to work. Now all three of these started with the S&P 500 futures pits in Chicago. See Chicago overwhelmed Wall Street. New York where the stocks underneath the futures are traded. Black Monday happened because stock traders didn't understand the power of the futures market back then which could flood the stock market with instant unseen supply. No one was ready for it. These days we accept the futures are worth watching. But it wasn't like it back then because they were relatively new instruments created about five years before the crash. And no one knew the power they had. See the power of the future snuck up on us as they were initially a much smaller market than the stocks themselves. Because portfolio managers could go in easily and out easily. Though the futures became the most powerful drivers of stock prices particularly for hedge funds. Even more powerful than the actual performance the underlying companies the stocks are meant to represent. Underlying corporate earnings used to be mean much more to the day to day action of the stock. The thing is, even with the relatively new impact of futures, Black Monday was highly unusual. We'd had a big run going into the crash of 87. It was a remarkable multi year rally with nary a substantial decline. And don't I Know it. I left Goldman Sachs in 1987 to start my own hedge fund because my returns had been so bountiful for investors. The multi year rally in the mid to 80s, the mid to late 80s had created such stupendous gains that a group of clever salespeople started offering big funds what they claim were insurance policies that could lock in gains and stop out losses after their funds have gone up so much. So called portfolio insurance involves something called dynamic hedging where these specialists said they could use futures to ensure that you no longer be exposed to stock market risk, say down 5 or 10% or some other number depending on the policy you took out. Yeah, it was like a stop loss these. The idea was that these policies would let you sidestep the losses. Of course it's impossible to do that. But they had such a great sales pitch, people believe them because the stock futures were so novel. In reality though, when the losses all kicked in at once on Black Monday, the portfolio insurance didn't work. If anything, the future selling from these insurance policies actually accelerated the decline in the stock market causing massive losses for the poor saps who bought these things. Many of the of the actual clients were wiped out. The people who sold these policies, they were charltons and mountains. Although history remember them says just really as idiots, not the crooks I thought they were. I lean toward the latter theory because there's no magic trick that can get you returns from investing in the stock market without much risk. Come on, the two go hand in hand. Don't believe anyone who tells you different. Those people are charlatans. Of course at the time we didn't know that the power of the futures could cause a crisis crash. We figure where there's smoke, there's fire. If the markets crash then there's going to be something wrong with the economy. Right? So we had to be recession lurking. Stocks couldn't go down on their own. There had to. Otherwise how could the Dow plummet 22% in a single day after falling 10% to week four? I say though it turned out wrong. The economy was strong going in the 87 crash and was strong coming out of it. There just wasn't any economic correlation with Black Monday at all. It was the interplay between Chicago much more powerful and realized in New York much weaker. That set up the conflagration. And when the treasury department examined what happened that day, it concluded the futures set off immense selling while some specialist firms on the floor of the exchange and some brokerage houses failed to step up in what Known as stabilize the tape. The latter had no duty to stabilize things, but the former were supposed to do so. The treasury found out that many didn't do the jobs. Now, I was fortunate enough to actually be in cash on Black Monday, having liquidated my portfolio earlier in the previous week because the market acted so badly I didn't want any part of it. Now, in retrospect, it did make my career. I look like a true genius. But the truth is I was just frightened of the market and wanted to regroup. I always say, though, it's better to be lucky than good. But discipline can help maximize your luck, which is why we spend so much time teaching you discipline in the CBC investment class. So here's the bottom line. Sometimes crashes have nothing to do with the economy. They're caused by the mechanics of the market. Stay tuned for more examples of this kind of decline. And the more serious animal, the Bear Market of 2007, 2009. So you can figure out what to do when they really maul us. Irma in New York. Irma? Yes.

[American Express Representative]

Good evening, Mr. Kramer.

[Jim Cramer]

I'm planning to open Roth non deductible Roth IRAs. IRAs for my grandchild who are all in their twenties.

[American Express Representative]

Am I better off with a growth.

[Jim Cramer]

Fund or an index fund? I want you to be in growth, growth for growth. Because they're young, you can switch the index in the 30s. Let's go for some real risk here. Because they got their whole life ahead of. And I really want you to hit it big right now for them. Tony. I am. I am alone in that, but I don't care. I really want risk taken when they're younger. Tony in Florida. Tony.

[Caller]

Hey, Jim.

[Jim Cramer]

I just want to let you know.

[Caller]

I'm a member from day one. It will be a lifetime member. I love you for your. What I want to ask you is when. When we like a stock and we love a stock and it reports earnings that are really good, but then for some reason the market buys it down. Can we buy it day one or do we have to use that rule like everybody says, wait three days before you buy a stock that goes down?

[Jim Cramer]

No, no, no. You buy it at your prices. You buy a little bit at the beginning and then like we teach at the club, you buy it on the way down. We may have a real battle on our hands now. You know, we battle in the club and we've been very successful in most of our battles. Some of them have been tougher, but that's the way you make it. So your battle won't be too hard. Buying it all at once does that, and we don't want that. Tough days don't last forever, people. But when they come along, you need to know how to respond on mad. Tonight, I'm giving you a crash course in crashes, sell offs, pullbacks and big market declines. So you'll be prepared to get the best possible outcome from the worst possible situations. So stay with Kramer.

[American Express Representative]

Don't miss a second of MAD Money. Follow Imkramer on X. Have a question? Tweet Kramer madmentions. Send Jim an email to madmoneynbc.com or give us a call at 1-800-743-7-CNBC. Miss something? Head to madmoney.cnbc.com at Capella University. Learning the right skills could make a difference. That's why our business programs teach you relevant skills you can take from the course Room to the workplace. A different future is closer than you think with Capella University. Learn [e-mail]. it's CNBC's Big January with CES from Las Vegas, biotech and pharma at JPM Healthcare, the World Economic Forum, Davos, and the first Fed decision of the year. Start the year ahead of the game. CNBC.

[Jim Cramer]

Time teach you how to cope with all sorts of declines. I already covered the crash of 1987, how it wasn't really related to the economy shocker, so it made sense to buy stocks from the smoke clearance clear. 1987 was a rare opportunity that took a little time to reveal itself, but when it did, ooh la la. It was also the first instance of the S&P 500 futures exercising the pernicious power over individual stocks, sadly, was the first of many. Which brings me to the fabled flash crash of 2010, one of those negative moments that drove away so many investors who never came back to stocks because they didn't know their value could be destroyed so quickly, almost whimsically. Who wants to keep their life savings and instruments that can blow up in the blink of an eye? Look, I don't blame anyone for not wanting to be in after the flash crash. What happened that afternoon was pretty much the same deal as Black Monday of 87. The futures overwhelmed the stock market and buyers just walked away betting that there had to be something substantive behind the destruction, right? Couldn't couldn't just be the machines breaking down, for heaven's sakes, could it? The flash crash started at 2:32pm on May 6th of 2020 of 2010. It lasted for 36 minutes. In that 36 minutes the Dow fell almost 1000 points from roughly 10,000 level. Very memorable for me because I had to be on air at the time. Immediately money managers tried to play the pin the tail on the sell off. There were riots in Greece and maybe this time was everyone was focused on southern Europe thanks to endless sovereign debt crises. Others pinned it on the newfound weakness in the US economy of which for the record there really wasn't any. Perhaps because I had the benefit of trading on Black Monday I recognized the flash crash exactly for what it was. Another situation when the machines were breaking is the futures overwhelmed the stocks. It wasn't the fundamentals. We didn't know it at the time but a gigantic error and sell order caused tremendous fear of the spread like wildfire. Many buyers just simply disappeared. They walked away. They didn't wait to wait around and find out what was causing landslide. Had to be something big, right? They just wanted to get out as fast as possible. Lightning on air. I called it a phony sell off because the decline had no basis in economic reality which made for a tremendous buying opportunity. That is not a real price. It's too bad. The system obviously broke down. We're going to find out that there was a glitch from pitch in. The machines failed and it obviously broke down. The market didn't work. It broke down. The machines broke down. That's what happens. That's exactly what happened. Had nothing to do with the fundamentals, just more of this nonsense. While some listen and actually bought stocks and what I had to say, many people simply didn't believe that equities could be that fragile and they left. It was shocking. In all the years I've been doing this show, I hope I taught you that stocks are not hard assets. They are subject to all sorts of whims that can reduce their value in a heartbeat including mechanical issues like we saw during that 36 minutes off. They're just, they're just not perfect enough and people think they are anyway. The market quickly regained its equilibrium but not before another round of individual investors left the asset class entirely and they never came back. Okay, how about August 2015 sell off where the Dow felt 1000 points right the opening Now I was seemingly related to fears that the Federal Reserve position to raise interest rates right in the teeth of still one more story about the China market collapsing. Hey, China's been collapsing for ages, right? Back then the Chinese market was the most dominant negative story out there. Kind of, you know, it's always been out there. But the whole economic edifice of the PRC could collapse from too much leverage at any given time. It's been a common frame. Somehow I find myself on air at all the right times to witness these events. That Friday before the sell off had been. It had been a monstrously ugly day as a Fed official late in the afternoon had suggested it was time to raise rates despite the Chinese sell off. It was an aggressive statement that demonstrated a cavalier attitude toward the market's ugly but also fragile mood. Now when we came in on Monday August 24th we heard that there were some very large sell orders in place for major stocks. We weren't ready though for the gap downs we saw where large capitalization stocks were shedding hundreds of billions of dollars of value many down 20% as the market opened and we had no ability to tell why. Like the crash of 87 was very tough to see what the real prices were. The confusion was that horrific. It was like trading in the fog of war. Yes, the fog of trading. Some prominent stocks looking at were down 40, 50, 50%. It was indeed crazy town. As the market rolled open the Dow ended up tallying a decline of about 1,000 points. When the smoke cleared at 10am I and my partners and squawk on the street were pretty stymied at the time. I remember turning to David Faber to chat about the meaning of the sell off. His reaction I thought was priceless. I don't. This is. I got to make some phone calls because that's. These are whether someone bosses these are enormous moves. I got to make some phone calls. I mean I remember when he said. I said yeah, that's it, I got to make some phone calls. That's how confused we were, that's how long we knew it was. But you can't just go out and say it's wrong again. We figured there had to be something very bad in the economy. Somebody knew something we didn't. Something mysterious, something otherworldly, something nefarious. Maybe China had actually collapsed. Maybe there was war somewhere maybe something occurred in Europe we even know about. We had to be assumed to be a good reason for that kind of decline. I was suspicious though because some of the hardest hit stocks were the recession proof names especially the biotechs which for some reason decline harder than almost all the rest of the market. Now that really made no sense. That's what people buy when the economy softens up for sake they are safe havens. Once again I suggested it was the machines that were causing the problem that the futures had overwhelmed the stocks and the computers are going Haywire. Just like 2010, just like the flash crash. By mid morning we learned that that was exactly the case in the stock market, then underwent a beautiful metamorphosis into a furious rally. Jumping 500 points from the bottom, strong stomach buyers came in and took advantage of the opportunity. The economy was gaining strength, not losing it. And a thoughtful Federal Reserve wasn't really about to tighten, not with China teetering. It was an excellent time to buy stocks. Why was there such fear and confusion at the time, both in 2010 and 2015? Why were this many crashes so frightening? I think investors weren't ready for either flash crash because post 1987 the government had put in what are known as circuit breakers. They were supposed to cool these declines by stopping trading momentarily. But the circuit breakers created a false sense of security that oddly still exists today, even as they failed to work properly on both occasions and did very little to stop the destruction of your nest egg. So please, when you hear talk of circuit breakers protecting you from fast declines, no, don't believe it. Fear can't be legislated or regulated out of the market. It will always be there. There will always be people who react horribly after an initial event, even as that event is mechanical and not truly substantive in nature in any way, shape or form. Now, there have been many declines worse than the flash crashes of 2010 and 2015. I can think of three days during the COVID crash when we were down almost from 7.8% to almost 13% in a single session. But the COVID crash was very straightforward. We knew exactly where the problem was. Government shut down the whole economy to fight a deadly plague. Zero confusion. Flash crashes were different. By the way, if you thought my own air commentary was useful in 2010 and 2015 and it was then, that's actually kind of more reason to join the CBC investing club. We show you how to run a portfolio in real time. We take all this stuff into account. In fact, these kinds of moves are never going to go away. As we get further from the last one, I always anticipate the next one. So what's the bottom line here? If you can figure out when a sell off is caused by the mechanics of the market breaking down, then you might have an incredible buying opportunity. First though, you have to determine whether the sell off is related to the fundamentals of the economy or not. If it is, stay tuned. If it isn't, stay tuned anyway. But recognize you have first class panic on your hands and nobody ever made a dime panicking. But boy oh boy, did they coin money Taken the other side of the trade. Bear Bunny's back after the break.

[American Express Representative]

At Capella University. Learning the right skills could make a difference. That's why our business programs teach you relevant skills you can take from the course room to the workplace. A different future is closer than you think with Capella University. Learn more at capella.edu. it's CNBC's Big January with CES from Las Vegas, biotech and pharma at JPM Healthcare, the world Economic Forum in Davos, and the first Fed decision of the year. Start the year ahead of the game, cnbc.

[Jim Cramer]

Not all days are winners in the market, and knowing how to handle the down days is key. We have you covered good and bad days here on Mad Money, and there are lessons in the really bad days that can help. So let's set the stage. Back In October of 2007, the Dow peaked at a little more than 14,000. If the Fed had raised rates over and over and over again 17 times. And the economy, after cheering for just a bit, fell off a cliff, took the stock market with it. It's one of those things that you could have seen coming if you paid attention. Specifically if you paid attention to me back on August 3rd of 2007 when I excoriated the Fed for having raised rates so much, oblivious to the damage it was doing to the real economy. I have talked to the heads of almost every single one of these firms in the last 72 hours and he has no idea what it's like out there. None. And Bill Poole has no idea what it's like out there. My people have been in this game for 25 years and they are losing their jobs and these firms are going to go out of business and he's nuts. They're nuts. They know nothing. Alright, what did I mean by that? Well, shortly before I came out and set that moment with my old friend Aaron Burnett, I've been talking to the head of a major Wall street firm about problems in the mortgage market. Pretty much everyone who followed the mortgage market, which is incredibly important to the healthy economy, knew that there were a lot of unsound practices occurring. Still, it was jarring when I was told by this executive that he couldn't believe how many people were beginning to default on their mortgages. Yeah, here's the keys. He talked about how many mortgages of the 2005 vintage. He used a term that I previously only associated with fine wine. Just weren't money good. Something that only happened once in our country's history and that was never supposed to Happen again. That's the Great Depression. I was a chaos. But you know what? I had a lot of friends at a lot of firms. So I started making a lot of calls. I wanted to see if this 2005 vintage thing was in trouble everywhere. I was ashy when I got off the phone as the problem seemed to be spreading like wildfire. I called mortgage bankers, I called guys who ran major firms. Yeah, that's what I said. My people, everybody said the same thing. We're in big trouble. And that's why I went off so strongly on my rant. Sadly, the Fed didn't listen, especially this fellow Bill Poole, who at the time was an incredibly important Fed official. He was so sanguine about things that I had to single him out in the rant. Years later when the Fed's transcripts for that period were released, I found out that my rant was brought up, but only as a joke. Soon after my they know nothing rant, we had a series of horrendous default of large banks and savings and loans, some of which were thought to be too big to fail and failed anyway. Including the largest savings and loan and two of the largest, most fabled brokerage houses. I did my best to try to get people out, even on the Today show to urge anyone who needed money near term to take it out of the stock market before it was all lost. For investors. What is your advice today? Whatever money you may need for the next five years, please take it out of the stock market right now. Very dramatic statement for savings. I thought about this all weekend. I did not want to say these things on TV. Well, sure enough, the market fell another 40% before it bottom. It's a good call now if you bought any time from when the stock market peaked at $14,000 until it was cut more than in half by March 9th of 2009. You lost a fortune, probably never came back in stocks, probably gave up. So how do you know know to avoid buying this kind of dip? How do you tell the difference between that lead up to the financial crisis and the sell off? It's a buying opportunity like Black Monday in 1987. Well, first you have to ask yourself about the state of the economy. Is business really getting crushed? Is employment falling off and falling off hard? Is the Fed standing pat or even raising rates when the real signs of cracks like major firms going under, big companies unable to pay their bills. Are there actual runs of multiple financial institutions around the country, not just one area? If the answer is yes, then you have a decline that could be joined at the hip with the real economy, one that has true systemic risk. That's the term meaning that the entire country could collapse. That's how it was during the financial crisis. It's why I got so angry when people say, hey, this is going to be like, I get angry every time. Oh, it's going to be as bad as 2007, 2009. There's of course nothing like that occurring because like I said, only twice in 80 years has it occurred. Even the COVID recession wasn't as bad because the moment we got a viable vaccine, everything immediately brought back to normal. We heard about systemic risk when some of the regional banks went under in 2023. But within a few months we were over it. So if you're worried about systemic risk, the odds are you're worrying too much. Second, you want to know if there's anything in place that can actually save the economy or turn it around. That's important too. Our elected leaders did very little to soften the blow of the financial crisis. What brought the market out of its funk was a statement by then Fed chair, Chair Ben Bernanke. So forceful statement made on 60 Minutes no less, that he no longer let American banks go under it. Boy, he was letting him go under left and right. Till then we had watched the Fed was just sitting on its hands. But the moment Bernanke decided that he needed, that something needed to be done. Stock market bottom. Were there ways to spot the bottom? I got a couple of signs that can help. There's a proprietary oscillator. I watched on it very heavily for the CNBC investing club. It's a paid subscription. Product measures buying or selling pressure. When you get a minus five, that indicates most likely too much selling. Hey, when you get a minus 10, well, you got to do some buying. Even if everything seems horrible. We were getting signals that things were much worse than that near the bottom in 2009. Another way to look at it. I got one. I like to see who's been pessimistic or concerned about stocks but is reluctant to say anything positive. Who then changes his tune. The best example of that kind of that big switch came from the late great Marques who had this to say back then. I'm going to step out on a limb here. Hold on. Everyone waiting for the bottom. I really do. I think we're going to have a rally.

[American Express Representative]

There we go, man.

[Jim Cramer]

Unafraid to make a call and well, I don't know whether it's going to, let me tell you, rally. But I think, in other words, I think today this is for real. Man, what a call. Look at that. March 10th of 2009, the day after Bernanke was on 60 Minutes. Just a huge contrarian call from someone who hadn't been willing to make one until that moment. Best call I've ever seen. Now, it certainly made a ton of sense to sell when I said to sell in October of 2008. But before you say to yourself, what happens if no one warns you again the next time? Well, I got, you know what, I got some good news for you. It's a little sobering, but it's good news. If you waited long enough, six years to be exact, you actually did get back to where you were before the bear market began. All right, six years. But if you sat tight in the worst market in living memory, you eventually got back to even and went on to make a killing. Yes, it would be better to take something off the table. 2008, like I told you too. But a lot of people struggle to get back in at a lower level because they got burned out of the whole asset class. They did worse than the ones who simply sat tight. So here's the bottom line. The financial crisis gave us a once in a lifetime bear market with true systemic risk. But that's the exception, not the rule. Let's take questions. Let's go to Stackwell, Washington. Stackwell, I don't know, having a cup of water right now. What's going on with you?

[Caller]

Oh, man, you know, I'm trying to have a cup of water. I got a lot of bad weather out here. Trying to get it together. I could definitely say we got to give a big shout out to you from the great Northwest though, Jim, you're doing a great job.

[Jim Cramer]

Done. Done. Thank you. I'll take that shout out now.

[Caller]

Now, because we get a lot of advice from all around the world. I figured like this, we want good bread, you might as well go to a qualified baker. So what I want to go and say to you, man, is it, I'm curious, is your feelings on using high yielding dividend stocks as a form of investment. Because the reason I'm asking is I like to know that if you feel they're too risky or if they cut dividends down or lose market value, are you going to be hit and if you do agree, as our barbell approach or can we take a balance in our, in our portfolio a certain way.

[Jim Cramer]

That you feel stack well, I love it, I love it, I love it. Now, I don't want to reach. I don't want dividends that are so high yielding that something's fishy. What I want are very solid companies with good balance sheets to pay dividends that we reinvest constantly. That is nirvana for me and that's the way I would love to invest if I could own individual stocks. The 2008 financial crisis gives a once in a lifetime bear market with true systemic risk. But you have to remember that's the exception, not the rule. Much more may have money ahead. In this special show, I'm giving you a flash crash survival guide with some takeaways from the crashes of 2010 and 2015 and the best ways to profit from market pullbacks. Then I'm answering all your Bernie questions with my colleague Jeff Marks. So stay with Kramer. In tonight's special survival guide edition of Bit Money, we're discussing how to deal with brutal sell offs, specifically how to defend against them, take advantage of them even, because you know I like to be opportunistic. Now I've told you not to be glib about the systemic risk sell offs that involve potential collapse of the US Economy. But those are easy to spot because it'll seem like the world's falling apart like in 2008. You don't need me for that. But now I want to help you game out the other less dangerous kind of crash, the mechanical kind caused by a broken market in a healthy economy. Now, the best way to deal with these sudden declines is to recognize that there's a bottoming process, one you can spot. So what should you do? I have a solution that has worked in even the toughest of times. I like to look at something I call the accidental high yielders. I actually call them a H wise on the show. Those are stocks of companies that are doing fine, have good balance sheets. That's very important, by the way. But their share prices have fallen so low that their dividends are starting to give you an unbelievable return. That's right, good yield. How do you spot these? When you look at the historic level of dividend yields you've gotten from certain stocks. Also want to look at the yield in the 10 year Treasury. If a stock typically yields a 2%, suddenly is paying double that because of a market wide decline, then you're probably looking at an accidentally high yield as long as the stock's been going down for no particular reason. And that's why when you're hunting for these dividend stocks, you should focus on companies that aren't particularly sensitive to swings in the economy that have very Good balance sheets. Second, if the yield level isn't giving you opportunities, I'd use a mechanical sell off to pick some stocks that you like. You can begin buying them using what's known as wide scales. That's why I recommended during the 2010 Floor Flash Rush, I told people to use wide scales. Pick one of your best stocks out there, Premier stock, and buy some using limit orders only. Don't use market orders because you might end up getting terrible prices. Frankly, you should never use market orders because it's especially stupid during a crash. I like this method because if the market does come right back as it did after the two flash crashes, you've picked up some terrific merchandise at amazing prices. Then you can flip the stocks for big profits or you can hold on them for the long haul. But take a look. I actually demonstrated exactly how this works during an appearance on TV. When the flash crash happened in 2010, PG is now down 25%. That's true. If that stock is there, you just go and buy it. That's can't be there. That is not a real price. When I looked at it was a 61. I'm not that interested in it. It's at 47. Well that's a different security entirely. So what you have to do though, you have to use limit orders because Procter just jumped seven points that I said I liked it at 49. So I mean, you know, you got to be careful.

[American Express Representative]

The market was down 900 points, we're now down 6.

[Jim Cramer]

Remember, I buy 50,049. I now flip it at 59. I just made. I just paid 500. Yeah, that's the crazy what I'm talking about. By the way, a lot of people end up doing that Proctor trade. I've been thanked for, I mean like a dozen times. People thank you. Remember the limit order advice. We really does ring true now. We've talked about meltdowns and true systemic risk and gut churning moves that are untethered from the economy. But how about the garden variety pullbacks we experience all the time? What causes these declines? While there are usually a bunch of different varieties, first you've got the sell offs caused by the Federal Reserve. That's probably the most frequent reason for stock dumping. There's a reason that businesses, business media constantly talks about the Fed. When the economy is weakening. It's the Federal Reserve's job to try to restore growth, which they did was the plum when Covid shut down the economy in 2020. As long as the Fed's printing money, almost every decline is a viable one. Just fact life. It's been like that since I got the business. But when the economy strengthening, it perhaps starts to overheat. Well, the Fed has a different mandate, stamping out inflation. When the Fed declared war on inflation in late 2021, the market started rolling over with the highest risk groups getting eviscerated. Now nobody wants persistently high inflation. Those of you who missed the 70s and 80s now know for from the post Covid experience. But we also don't want the Fed to break the economy like it did when it raised rates 17 straight times in lockstep going into the Great Recession. It caused the Great Recession. Now there are plenty of times when the Fed's tightening, but the stock market didn't get crushed because the economy didn't get crushed. And that's how we got the incredible bull market in the first half of 2023. However, whenever the Fed tightens, some prognosticators will come out of the woodwork to tell you the market will crash or at least take a very big header. That's inevitable. So when you hear these comments, please don't panic. Fed rate hikes don't necessarily lead to crashes. In fact, I've seen plenty that do next to nothing. But there are rational reasons why the stock market deserves to go down when the Fed tightens. And I'm not ignoring them. First, stocks are only one of the are only one of the assets available to individuals and institutions. For instance, there's gold, there's real estate, of course, the bonds. I like gold as a safe haven. I believe that every person should hold some gold, preferably bull billion. But if not, then the gold is a hedge against economic chaos. Real estate, actual real estate can be a good hedge, but most people don't have the money to invest in that kind of real estate. The big institutions can buy. Now we do have real estate investment trusts, but they're not as reliable proxy for real estate as a whole. Finally, we have bonds as an investment alternative. And bonds are the source of the problem when the Fed tightens. You see it yourself. When short term Treasuries give you more than 5% risk free. Lots of people cash out of the stock market and park their money in Treasuries. Hey listen, it's not a bad return. As the Fed tightens bonds, particularly short term pieces of paper, become more competitive with stocks. You'll notice as the Fed jacks up rates high yielding dividend stocks are going to be among the worst performers because suddenly they got some serious competition from fixed income. So please be careful of these dividend stocks as safe havens when you're dealing with a sell off caused by the Fed. They're very different from accidental high yielders that can spring back when the Fed starts tightening. The second reason why stocks can go down legitimately when the Fed raises rates because the Fed isn't perfect. They've raised rates when they should have stood pat or even been cutting rates fast because the economy was already slowing rapidly. Although in recent years Jay Powell has been much more responsible about not pushing us off a cliff than some of the previous Fed chiefs. Here's the bottom line. Garden variety pullbacks can be gained as long as there's no systemic risk involved. But sell offs in the wake of the Fed raising rates, those are trickier, although they can lead to decent opportunities as long as you stay away from the high yielders that become less attractive than the Fed tightens. And stick with the accidentally high yielders that might just give you the delicious bounce when the Fed's done tight. Matt Money will be back after the break.

[Caller]

Booyah Jim. Your integrity makes you the Booyah Saint of Wall Street.

[Jim Cramer]

Booyah Jimmy chill. Booyah Jimmy chill. Booyah Jim. Quadruple. That's a lot of booyahs. Tonight we're talking sell offs specifically during this block. What causes garden variety pullbacks? Many times the problem is indeed the Fed as I mentioned before the break. But sometimes there are other issues that are driving the carnage. For starters, there's the issue of margin. As a former hedge fund guy, I'm well aware that there are many times when money managers borrow more cash than they should. So when the stock market goes down, they don't have the capital to meet the margin clerk's demands. These kinds of margin declines have repeatedly happened, including say February of 2018. That was a good one. When funds that had borrowed money to bet against stock market volatility, the so called VIX got their heads handed to them. They were short the VIX betting the market would remain calm. Stupid. At the same time they bought the S&P 500 using borrowed money. Again, real stupid. When the stock market fell, these managers were forced to dump their S&P 500 positions that raise capital and unwind their trades. There were so many managers doing this at once that their selling ended up causing some severe, severe market wide loss. These margin induced breakdowns often occur after the market's down for several days in a row. That's why I'm often lucky to tell you to be aggressive in the first few days of a big decline because there will always be margin clerks against these managers who buy stock with borrowed money and that doesn't happen immediately. They got to have to keep chopping. How do you spot these margin call driven declines? You know what? I use the clock. Margin clerks don't want their firms to be on the hook for overstating individuals, for overstretched individuals, or for hedge funds. They want to get out before the night. So margin clerks demand the collateral be put up, raise some cash or they sell you out of your positions without your say so. I always consider the margin clerk, the butcher, and the butchering occurs between 1 and 2 o'clock if the selling runs its course by 2:45pm Yes, I find it's actually that specific. Then I think you have a decent chance to start buying safety stocks. The kinds of stocks that tend not to need the economy to be strong to advance. Like the health cares. You might also want to buy the secular growth plays that work in any environment. Mega cap stocks. I thought I talk about them all the time, especially members of the CNBC investing club because we like to own the best ones for the travel trust. What else can create viable opportunities? Sell off from Overseas I cannot tell you how often I've heard commentators who scare the bejesus out of us because of imported worries, say from Greece or Cyprus, Turkey, Venezuela, Mexico, countless other places. I always tell you to ask yourself, do any of these woes truly impact the stocks of the American companies in your portfolio? Do they really make you want to pay dramatically less for an individual US stock? Usually the answer is no. Unfortunately though, you can't just start buying stocks hand over fist into an overseas driven sell off off. You should always assume there are people who don't understand how unimportant these worries are in the vast scheme of things. And of course those people are going to panic and sell after you would have thought they would have known better. That's why these international declines often last for three days. Again, the best way to figure out if they're done is to watch the clock as the sellers usually need to be margined out against their will if there's going to be a bottom. Another kind of sell off the IPO related decline. Remember, at the end of the day, stock markets are markets first and foremost and markets are controlled by supply and demand. So if the bankers start rolling out lots of new IPOs and then these companies sell more shares via secondary offerings, you could end up in a situation where there's just much too much supply and not enough Demand. By the way, we saw this near the end of 2021 after we've been drowned under the weight of 600 odd IPOs and SPAC deals. Oh man, don't buy, don't buy. My suggestion? Avoid the blast zone, the area where most of the new IPOs are concentrated, and focus on the stocks that are down due to collateral damage, especially ones with yield protection. Sometimes we get declines triggered by multiple simultaneous earnings shortfalls. Oh, you got to be real nimble with these if you want to buy stocks after an earnings induced pullback, isolate the sectors where the shortfalls are occurring and avoid them like the plague. There's no reason to stick your neck out here. Instead, buy unrelated stocks that have been hit by the much broader selling via the S&P 500 futures. Then there's the trickiest kind of risk, one that's truly Tolstoy ask political risk. I often find this risk tremendously overblown, whether it's because of strife between parties or trade policies or even all out war war risk. I am not a political guy and I hate talking about this stuff on air and off air. But with every stock you own, you need to ask, does this company have direct earnings risk when it comes to Washington? If not, then you've got nothing to worry about. However, if you own something that's directly impacted by say a trade dispute with China or a government shutdown, well, it could turn into a house of pain. I know political risk is enticingly negative because, well, there are so many pundits everywhere waiting in and give you 2 cents. I think these guys want to scare you. My suggestion? To it all out, please. Instead, look for companies that have nothing to do with the political fray, even as their stocks may be brought down by it, like we see every time there's a debt ceiling standoff. I can't tell you how Many times since 1979 I've seen politics used as a reason to sell stocks. Now they may be a reason to sell some stocks, but rarely has anything in Washington been enough to sell everything. Here's the bottom line. There are all sorts of sell offs, but unless they involve systemic risk, which is increasingly rare like in 2007, 2009, they're going to prove to be buying opportunities long term. You just need to recognize what's driving the decline, note the signs that it might be subsiding, and then take action to buy, not sell, and never to panic. Stick with Cramp. I always say the favorite part of this show is answering questions directly from you. And so tonight I'm bringing in Jeff Marks, my portfolio analyst and partner in crime. Help me answer some of your most burning questions. For those of you who are part of the investing club, which of course I want you to be, he'll need no introduction. For those who aren't members, though, I hope you will be soon. I would say that Jeff's insight and our back and forth helped me to do a great job for all Mad Money viewers and more importantly, members of the club. So if you like this, be sure to join the club. First up, we're taking a question from Peter, who asks, as a younger investor that is able to add funds to the market biweekly when paid and the trust having a set amount of funds, how do you recommend putting your new money into work? Well, frankly, Jeff, as you know, it doesn't really matter. We have a set number of funds. I always remember when my late father would look at the, at the list and say, listen, I'm not going to buy all these, which was never supposed to. I'm going to pick six of my favorites. My suggestion is that each time, every two weeks, pick six of your favorites. Stick with the six if you want to, but invest, invest, invest. And if it's down, invest. And if it's up, invest. Don't miss it. That's the way I would do it. Next up, we have a question from Michelle in California who asks, how do you know when to break your cost basis? Discipline always trumps conviction. We almost never do this. When we do it, and we've done it sometimes, say for Magnificent Seven stock is what we call them, what's happened is, is that those are really the only ones you can do it because they come down a lot. When they come down a lot, you want to buy it. We've had stocks that have come down and come up and then when the market got oversold, we feel tempted, but we do it very rarely. Yeah, I would say general rule of thumb, if the stock is down, call it 10% from a level, but the story has actually gotten better and the stock is down just due to, you know, market forces.

[American Express Representative]

That's it.

[Jim Cramer]

That would be a good time to write up. And then it goes down less and you want to be able to be in there. It is true. That is something that you can do. We don't do it very often. Now we're going over to one of your mad mentions. This is one from the Blues Rock who says, jim, are you sure you're not a fellow Italian? The best sauce, not gravy, starts with those tomato jars. So let's eat. You know, my family's got some Irish in it, but not an Italian in it. So I really don't know what to say. I will point out the sourcing came from the fact that my tomato yield was so great, I had no choice but to sauce, sauce or throw out. And I was not going to do that. Next up, we're taking a question from Jeff in Florida who asks if a stock has been in the red for a couple of years and I averaged down during that time, when is a good time to sell some of that stock? Do I sell someone it finally gets back to it even, or do I risk it and what more until I have more substantial gains? This is a really important question because what you find is at the same time that you see when it gets back to even and you want to sell it is precisely when there are a lot of people who start getting interested in it. I've always found I call it stuck in the mud. When it finally gets out of the mud, people get very excited to sell. What you should think is, no stocks out of the mud, mind, people want to buy. So the answer is, hold on. Yeah. And something that I learned from you is that we don't care where stocks came from. We care about where they're going. So if the outlook is still strong, you want to hold on. Definitely. Definitely. Now, I always like to say there's a bull market somewhere. And I know I've got to end the questions. I don't like to do that on break form and say, thank you very, very good, Jeff Martin to have you on the show. And then I promise to try to find new ideas that are good for you. Right here on Mad Money. I'm Jim Kramer. See you next time.

[American Express Representative]

All opinions expressed by Jim Cramer on this podcast are solely Kramer's opinions and do not reflect the opinions of CNBC, NBCUniversal, or their parent company or affiliates and may have been previously disseminated by Kramer on television, radio, Internet, or another medium. You should not treat any opinion expressed by Jim Cramer as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Kramer's opinions are based upon information he considers reliable, but neither CNBC nor its affiliates and or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. To view the full Mad Money disclaimer, please visit cnbc.com madmoneydisclaimer Is it time to reimagine your future? The right business skills may make a difference in your career. At Capella University, we offer a relevant education that's designed to focus on what you need to know in the business world. We'll teach professional skills to help you pursue your goals like business management, strategic planning, and effective communication, and you can apply these skills right away. A different future is closer than you think with Capella University. Learn more at Capella Eduardo.