Jim Cramer told viewers of his "Mad Money” television show yesterday that an "overheated market” in China and Dow Jones system error were to blame for the U.S. stock market dropping 416 points yesterday "in the blink of an eye.”
While there were plenty of buyers in the crowd of sellers, they "simply couldn’t get to the floor fast enough to buy,” he said.
Meanwhile the selling, which Cramer offered was exacerbated by exchange-traded funds, "cracked the dam.”
The "most important takeaway” here, Cramer told his viewer, is that market players only have three protections "from the whims of a broken system.”
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First, there are companies that pay dividends equal to or better than Treasuries after taxes — a "great defense,” said Cramer.
Second, he added, there are stocks that are "so low in valuation” that investors and the companies themselves know they are bargains, "meaning they are buying back stock right here.”
Lastly, he said, you need to have companies that are so defensive in nature that if there is a worldwide slowdown, these companies will meet their expectations regardless.
If a company doesn’t have at least one of these three protections, investors will not be okay for now, Cramer said.
After the "worst trading day in years,” Cramer advised people to take the sell-off as an opportunity to start buying financials, in particular, he said, one of the five major brokers — Merrill Lynch, Lehman Brothers, Morgan Stanley, Bear Stearns and Goldman Sachs.
For the first time that he can remember, Cramer said all five big brokers are "being run by great management.” He added that a company’s management can make or break its performance.
Cramer likened yesterday’s sell-off to the crash of 1987. While a Chinese sell-off started the selling yesterday, he explained, the German market caused it in 1987. And just as the market didn’t reach a bottom the same day, Cramer said he believes we have not seen the end of yesterday’s sell-off either.
"That is why people should be in as protected zone,” and look for dividends and buybacks, he said.
Cramer urged people not to panic and to be buyers. But don’t buy all at once, he advised, and don’t expect immediate gratification. Be patient.
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