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[Ulisses Pereira]

How Bonds Really Hurt Stocks

By Jim Cramer
RealMoney.com Columnist
6/12/2007 11:38 AM EDT

"When I used to trade "versus" the bonds, meaning that I would take heed of them, I would often marvel at how quickly the market repriced the long-term risk of stocks. We like Celgene (CELG - commentary - Cramer's Take - Rating) knowing that the 2012 earnings could be great, but we hate Celgene because if the bond trajectory continues, we won't pay $50 for those earnings.

You see the only way to value these long-term assets, meaning stocks we buy for earnings way in the future, is to figure out how much we will pay today -- and many people use the bond market to gauge what they will pay. As rates go up, we pay less for the outyears.

That's what you see right now. Only low-multiple stocks will get a boost here, if there is one, and anything high-multiple gets crushed.

The good news here is that there really isn't that much difference between 4.5% and 5.25% -- the 10-year's range.

The bad news is that there is a difference between 5.75% and 4.5%. That's just a quantum leap that will play havoc on this being a way to figure out those future earnings.

When you overlay the technicals -- will we take out the S&P's low of last week? -- and you decide that interest rates are too much on the move to make any discount rate calculations, you just sell. You sell the very high growth stocks that you normally would buy.

That's why I say again, just follow the 10-year. Until it settles, even if it settles at 5.5%, I would go right back to growth. But if we get to 5.75%, the majority of people out there will use 6% and at 6% on the 10-year you are going to get tons of money out of this market and a lot of people who truly don't want to own long-term growth stocks. "

(in www.realmoney.com)

[Ulisses Pereira]

"Respect the 10-Year"

By Jim Cramer
RealMoney.com Columnist
6/12/2007 10:08 AM EDT

"The futures are doing what they do best: playing Whac-a-Mole with common stocks. Every time we get near 5.25% on bonds, big institutions unleash waves of equity future selling and tons of Treasury buying. The wall of Treasury selling quickly overwhelms the buyers, the yields become even more attractive and a new wave into bonds and out of stocks -- again, using futures -- occurs.


In the meantime, you get good earnings like Lehman Brothers' (LEH - commentary - Cramer's Take - Rating), which were truly beautiful at $2.21 instead of $1.88 -- and the market questions whether this is "the end" of the brokerage advance.

They don't know we are playing Whac-a-Mole.

Those of us who have lived through these "out of stocks, into bonds" moves -- including last year's debacle in the spring -- are prepared to ride it out.

Of course, at that time there were enough stocks that were lower and cheaply valued that you could just pick and wait for the real buyers of individual equities, including the companies themselves, to step up and at first stabilize and then take up the stocks. I am thinking in these cases of Altria (MO - commentary - Cramer's Take - Rating) and AT&T (T - commentary - Cramer's Take - Rating) and Citi (C - commentary - Cramer's Take - Rating), all of which had high yields, and although Altria had no buyback it did have the sizzle of the breakup. (Still does.)

This time people are reaching for the Caterpillars (CAT - commentary - Cramer's Take - Rating) and the Transoceans (RIG - commentary - Cramer's Take - Rating). Always different, these bottoms.

My suggestion: Just put the darned 10-year on your screen, right at the top left, and respect it. It's in control. We are hostage. Until we get to some level where we develop Stockholm Syndrome and like bonds.

Not yet, though. "

(in www.realmoney.com)