Enough About Bernanke; Mastering Supply and Demand: Jim Cramer's Best Blogs

TheStreet.com

 

NEW YORK (TheStreet) -- Jim Cramer fills his blog on RealMoney every day with his up-to-the-minute reactions to what's happening in the market and his legendary ahead-of-the-crowd ideas. This week he blogged on:

  • this bull market
  • supply and demand

Click here for information on RealMoney, where you can see all the blogs, including Jim Cramer's -- and reader comments -- in real time.


Enough About Bernanke 

Posted at 1:48 p.m. EDT on Friday, Dec. 20

Rates going lower after the long-awaited taper -- that was supposed to crush bonds and send interest rates through the roof?

Earnings coming through in the last couple of weeks when we should have had massive shortfalls?

No politicians on television, at least none expressing rancor?

So, let's sell stocks with reckless abandon -- oops, that doesn't go with the other bullets, does it?

Yep, there's a central problem for those who think the market's at a precarious and dangerous level, one where we could drop any minute and drop hard. The central problem is that we need a reason to sell. We need justification beyond the desire to lock in a good year because there aren't enough days left or enough events left to merit locking in. You are pretty much stuck with your performance, so why not go along for the ride? The only people I can figure who need to take action are the shorts in order not to be run out of town.

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Such is the life of a bull market where things tend to work themselves out. We are so used to seeing a decade of what amounted to bear market rallies that many don't even recognize what this market's doing: reacting to positive news in a positive way and believing that negatives will be resolved positively.

This is a market that silently, without rocking the boat, is giving Ben Bernanke his due for figuring out how to do things right so as to keep rates down and keep stocks up. He's not the reason why we are having this bull market, he's one of many reasons and they are logical, not artificial.

As I listen to people argue about gross domestic product figures inflated by Bernanke, I just have to laugh. Does anyone take politics, politicians or people who think politically seriously anymore? I think the public recognizes that those kinds of discussions are relics of the old days. They want to find the next Twitter , not the next aided-by-Bernanke-but-it-could-go-away-any-minute stock.

The public sees good things happening. The public recognizes that brands it likes are working and that the money being put in stocks has been performing better than their other assets for some time. They want more stock. There aren't many willing sellers.

That, not Bernanke, is why the market goes higher. He helped (he sure didn't hurt), but, frankly, why dwell on it? It makes you no money. Take it elsewhere. I am tired of hearing about it. So are you, I bet.

At the time of original publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no position in the stock mentioned.




Master Two Levels of Supply and Demand 

Posted at 3:43 p.m. EDT on Thursday, Dec. 19

I've always been adamant that you don't need a degree in economics to invest wisely. All you need is the ability to think critically and make judgments about companies you find compelling, after looking at the annual report, reading the conference calls and understanding where that company fits into the economic firmament. Does it do better when the economy's humming? Does the strength or weakness in the economy mean little to the enterprise's earnings? Do earnings go higher if the Fed keeps interest rates down to spur the economy? Will it get hammered if the Fed says the wrong thing?

But there's one part of the economics lexicon that does matter to stocks, and that's the law of supply in demand. As someone who took a ton of economics classes, this concept got pretty much tattooed to my brain. However, I find that many people don't understand it. So I am going to explain in a simple way how the law of supply and demand affects stock prices and earnings, because it is driving a lot of the price movements that have been mystifying people of late.

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First, there's the law's application to the stocks themselves, not the entities they represent but the actual equity that trades.

Let's contrast two equities, Twitter  and Citigroup .

Twitter is rallying, because there's not only more demand for its stock than there is supply, there is also more demand for stocks in its sector than there are stocks. It seems as if no one who bought Twitter on the deal is interested in selling it now, because they believe that this company is going to come up with a gazillion ways to make money with advertisers. Perhaps more important, the market perceives that there are only a handful of companies that have mastered social mobile and the cloud, and Twitter is one of them and Facebook  is pretty much the other. Consider that Facebook is creating 27 million shares, and the CEO and founder Mark Zuckerberg is selling 41 million shares. Normally, that would club a stock down 5%. The darned thing is barely down. Demand is overwhelming supply.

Now consider Citigroup. It's one of hundreds of banks, all of which are pretty much trading together. We don't need more bank equities. Second, there are 3 billion shares outstanding, and no near-term hope of that number shrinking, as the regulators seemed determined to force Citigroup to have as much capital as possible on hand. It's a supply-demand nightmare.

The second kind of supply and demand that people don't seem to get, though, is when there is tightness of a particular product until more plants come on line to create price equilibrium.

Take DRAMs, the most basic form of memory chip. Micron  is one of the biggest makers of DRAMs in the world. The DRAM market has been oversupplied for years and years, but recently companies that manufacture them have been faltering, and there's been no new capacity added in some time. That has allowed DRAMs, which have been perennially falling in value, to stabilize and even increase in average selling price.

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This week, Micron took a real header. Why? Because its competitor Hynix is rumored to be building a new DRAM factory. Just the rumor sent the stock down, because a competitor's new factory could put the DRAM market into equilibrium or, worse, oversupply, and prices would plummet. That was all it took.

Similarly, Seagate  and Western Digital , two big disk-drive manufacturers, have benefited from a surfeit of new drive factories, as neither they nor anyone else saw much of a need for new ones, given the decline in PC sales and the ascendance of flash memory. But get this, just the idea that a DRAM factory might be built sent these stocks lower, for fear that it might lead to new disk-drive capacity.

Yep, you don't need to be an econ major to understand stocks, but if you don't understand supply and demand, and you don't recognize how it can affect the pricing of the stocks you own, then you will be mystified about stock price movements, and a mystified investor is a bad investor. Know your metric. If something is in tight supply, it could go higher, and if there's a ton of it, you can bet it's going lower. 

At the time of original publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long FB.

 

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