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cramer on oil and the market

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Cramer: Don't Sell Them

By

JIM CRAMER | JAN 06, 2015

OK, some facts about oil, with worst-case scenarios.

First, 16 states benefit from higher oil prices, of which a half dozen rely on them for real job growth. Roughly 10% of the population of this country lives in those states. Let's presume they ALL get hurt by lower oil -- a pretty silly proposition, but let's do it. Two hundred and ninety million Americans benefit from the price decrease.

One percent of the job growth in the last four years has come directly from oil jobs. Two percent, if you include job-related growth, because the multiplier effect isn't that strong, according to the latest statistics from JP Morgan.

Those two numbers tell you that the vast -- and I mean vast -- majority of the people see a huge benefit, a gigantic tax cut, if you will, from this decline.

Ten percent of the S&P 500 directly gets hurt by this decline and twelve percent total if you include all related stocks. That doesn't mean that 88% do better but it does mean that, again, the vast majority of earnings get revised UP not down on this decline.

Oil has historically been the most volatile commodity, mostly because it can't react correctly to sudden shifts in supply and demand. Remember oil fell $100 in a straight line in six months in 2008. That was mostly driven by demand. This decline is driven by supply and demand.

None of these indicates the stock market should have a prolonged downturn from oil.

OK, let's keep worst-casing: 18% of high-yield debt is related to oil and gas, much of it concentrated in weak, but diversified hands by investors. Since the plunge began in earnest, the high-yield index has fallen from $94 to $88. If we drop another 10% in oil from here, and we presume that the entire index trades one-for-one with that, then we see a drop to $80 –again, highly unlikely, but a peak-to-trough rate of about 15%, totally within reason for the funds that own this junk.

The cash flows of the oil companies coming into this decline were truly bountiful without only about 20% of these issuers truly stretched. Let's say they all default. It doesn't mean the bonds go to zero, nor does it mean the Texas banking sector goes under. Three reasons:

There are so many large major oil companies that covet the ownership of our assets because, while they are short-lived they are cheap, with the average well coming in at $40 in the Eagle Ford and the Permian. (Not so the Bakken, which does get hit badly, but only 800,000 people live in North Dakota and it remains a largely agricultural state.) So there will be plenty of companies that take advantage of the failures.Unlike previous declines, only three major banks are truly Texas-related. The Great Recession rationalized the bank system in this country and put it in the hands of just a few well-capitalized banks that couldn't be taken down by huge defaults anyway. This isn't the housing industry.We don't know if oil is going to stay down here forever, as most of the times the cycles have been self-correcting in a matter of about 18 months. All of this adds up to a scenario where the country tacks on about 0.4% growth from lower prices historically, with the stress felt pretty much simultaneously with the rewards.

There have only been a few times when oil shocks to the downside have coincided with lower prices for most stocks, and that's when there were demand shocks. We certainly have demand issues overseas, particularly in Europe. But it is important to remember that the vast majority of emerging markets benefit from lower oil including, most importantly, China.

So let's sum it up: the velocity of the move is frightening. But directionally, it is an overall positive. You have to weather the fear to see it though.

My advice: weather it. And remember, if oil were going up 10% two days in a row instead of down, I would be telling you to sell equities not buy them. So I am telling you to buy them, not sell them.