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  1. Home
  2. / Investing
  3. / U.S. Equity

There Is 12% More Downside to This Market

We need to clear three big hurdles.
By JIM CRAMER Sep 28, 2015 | 06:19 AM EDT
Stocks quotes in this article: VLKAY, TM, GM, FCX, GLNCF, PBR, OLN, DOW, CLF, BTU, ACI

Negativity vs. negatives. When are we going to be officially too negative over the same old worries: commodity collapse out of China, Fed rate hikes, and Volkswagen (VLKAY)?

Let's take the last first. The Volkswagen company, with its tortured, insular ownerships, is being viewed everyday as a looming disaster. Oddly, though, it is only looming for that company. When Toyota (TM) had a horrendous recall not that long ago, one that many thought would wipe the company out, it was viewed only as negative for Toyota. Ditto General Motors (GM).

Right now, though, Volkswagen is weighing on the whole sector. I think that's just stupid, but it is a sign of how early we are in the crisis. Will Volkswagen survive? I think yes. In this form? No, I don't think so. But, regardless, sales are going elsewhere and that's bullish for all of the other car companies.

The Fed? It is rapidly becoming a sideshow. I don't want to fight the Fed's moves anymore, because they are becoming silly. The Fed has become a major distraction because those who keep pushing the Fed clearly must think that none of the weaknesses we see in manufacturing have anything to do with the Fed. And the Fed wants to take rates to where it can cut them if things get slower.

Nowhere does anyone seem to ponder whether the Fed won't be raising rates now only to cut them a year from now in an existential crisis of meaninglessness. But that would seem to please most watchers now, so I think it is no longer practical to develop a worldview without assuming a hike by year-end, and the arguments against it are so obvious that they are no longer worth articulating. What's going to be done is done.

Finally, there's the commodity collapse and China. The copper complex is dominated by Glencore (GLNCF) and Freeport-McMoRan (FCX). Both need to raise more money than they can. Who knows what will happen there, but can we stipulate that it's not bullish? The Saudis could easily raise the price of oil tomorrow, there's that much demand.

But that would allow new life to be breathed into this business domestically and would save Petrobras (PBR), which you have to figure it knows it will soon default on its debts if no price rise occurs. To make a big decision with your capital before Glencore and Petrobras are resolved has become almost foolish. We need to see how things play out

As it is, when it comes to the commodities business, credit is being cut off pretty summarily as anyone who watched the torturous Olin (OLN) deal on Friday, when the chemical company had to pay 9.75% for money to be able to buy Action Alert PLUS portfolio holding Dow Chemical's (DOW) commodity chemical business.

Hideous.

I don't even want to speculate what will happen with little outfits like Cliffs Natural (CLF) or Peabody (BTU) or Arch (ACI), all if which are knee-deep in the collapse of Chinese commodity demand that is not only slowing but seems to be grinding to a halt.

Within this piece is pretty much the whole catalogue of why we are in a bear market. You need all of these cleaned up before any advance can be trusted.

I just don't see it happening yet. The other way, of course, to clean them up is if we finally get so negative that pricing reflects these negatives. I have been saying we need a 15 price-to-earnings multiple for that to happen, and we are only at 17x earnings. That would imply, without any relief on these issues, about 12% more downside. Therefore that's my new downside target barring clarification on these issues.

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Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long DOW.

TAGS: Investing | U.S. Equity

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