Shorting Cramer
By BILL ALPERT

THANKS TO HIS NIGHTLY CNBC SHOW Mad Money, Jim Cramer has become the
chief cheerleader for the bull market, or what was the bull market
until a few weeks ago. Last spring, he was giddily exhorting the Dow
Jones Industrial Average toward 15,000, with no troubles in sight.
Earlier this month, as the Dow tumbled in the direction of 13,000,
he had an on-air meltdown, complete with screaming, sobs and
predictions of financial doom. The clip quickly made the rounds on
YouTube. Friday, after the Fed cut the discount rate, he said that
the Dow's run to 14,500 had begun. With dramatic pronouncements like
that, it's no wonder that more than 100,000 viewers tune in each
weeknight for his antic mashup of sound effects, Streetwise advice
and stock picks.

It's those stock picks that caught our attention. Cramer, by all
accounts, had a stellar career as a hedge-fund manager. And he is
held out by CNBC as the guy who can help viewers make big money. But
a comprehensive and careful review of his stock picks by Barron's
finds that his picks haven't beaten the market. Over the past two
years, viewers holding Cramer's stocks would be up 12% while the Dow
rose 22% and the S&P 500 16%, according to a record of 1,300 of the
CNBC star's Buy recommendations compiled by YourMoneyWatch.com, a
Website run by a retired stock analyst and loyal Cramer-watcher.

We also looked at a database of Cramer's Mad Money picks maintained
by his Website, TheStreet.com. It covers only the past six months,
but includes an astounding 3,458 stocks -- Buys mainly, punctuated
by some Sells. These picks were flat to down in relation to the
market. Count commissions and you would have been much better off in
an index fund that simply tracks the market.


When we asked Cramer and CNBC for their own records of Mad Money's
stock-picking performance, they had more excuses than a Tour de
France cyclist dodging a blood test. They complained that the list
from YourMoneyWatch.com contained some stocks from the
program's "Lightning Round," in which Cramer gives a quick analysis
and a buy or sell decision on stocks phoned in live by viewers.
These, they argued, shouldn't count in our tally.

CNBC officials also said that viewers should buy Cramer's picks a
week after they're aired. They said that the show is mainly
educational, and not just about stock-picking. In the end, they said
we should focus only on the tiny universe of stock selections --
about 12 a week -- that Cramer researches the most. And we should do
it only for the issues picked this year. CNBC analyzed these stocks,
and said that if held for one month, they beat the S&P by 0.8%, or
1.7% after two months. They offered no results for the year-to-date.

We analyzed those stocks ourselves, and, as in all our calculations
for this story, relied on Patrick Burns, a statistical-computing
expert in London who consults for hedge funds and major investment
firms.

It turns out that CNBC did its analysis incorrectly, and that the
stocks beat the S&P by 0.4% in one month and 1.2% over two months.
CNBC measured the stocks' performance against the average
performance of the S&P year-to-date, instead of against the
performance of the S&P from the date of each stock pick. Also, it
included more than 100 recently recommended stocks that weren't held
for the full one- or two-month holding period that CNBC claimed.

More important, the stocks fell short of the S&P by a statistically
significant 2.2% through last week.


Our question is: How are viewers supposed to know that they should
pay attention only to this subset of stock picks each week and
ignore the thousands of others that Cramer makes on his show?

Then there's the day-after-pop phenomenon. Our analysis of Cramer's
picks over the past two years, from YourMoneyWatch.com, showed that,
on average, the stocks jumped 2% the day after he mentioned them.
From there, they usually moved sideways or down for the following 30
trading days (see chart). This offered an opportunity to make money -
- 5% to 30% a year -- by selling Cramer's selections short.

Cramer agrees that there is a shorting opportunity in the temporary
effect he has on stocks -- a trade that he'd jump on if he still
were at a hedge fund. "If you short the bump, you will do well," he
said last week. "I've said it on the show many times."

There's no doubt that Cramer is trying diligently to make you money.
His advice is generally smart, his knowledge of individual stocks
amazingly detailed. But the credible evidence suggests that the
telestockmeister's picks aren't beating the market. Did you really
expect more from a call-in host who makes 7,000 stock picks a year?

THE 52-YEAR-OLD CRAMER HAS PROVEN HIMSELF a Renaissance man, if you
don't mind applying that term to someone who goes on TV donning
everything from Rasta wigs to football helmets, and, on a bad day,
decapitates bobble-head dolls made in his own likeness. He struck it
rich in the heyday of hedge funds, started a successful online media
company and put up some of the best financial journalism in print
and broadcast. Simultaneously.

He's written several books, including Confessions of a Street
Addict, a wonderful memoir of his highs and lows as a trader and
entrepreneur. It's peopled with the amazing Old Boy network that
Cramer started building during his days as a student at Harvard: New
York Gov. Eliot Spitzer, New Republic editor-in-chief Martin Peretz,
Microsoft CEO Steve Ballmer. And, it turns out, the screaming, chair-
throwing character that Cramer plays on TV is based on the real-life
person he was, as he pursued success through any obstacle, including
those of his own making. In the memoir, Cramer freely confesses to
his screw-ups, as he continues to do on Mad Money. That self-
flagellation makes him a lovable protagonist in a modern American
success story.

Table: 10 Biggest PopsAfter entering Wall Street as a Goldman Sachs
broker, Cramer started his hedge fund in 1987. The market crashed,
but he was in cash. His firm, Cramer Berkowitz, went on to rack up
24% annualized returns over the next decade or so, a performance for
which Cramer generously shares credit with his former colleague,
Jeff Berkowitz, and one of the firm's traders: his then-wife, Karen.

If Mad Money offers unconvincing proof of Cramer's long-term stock-
picking prowess, so does his account of his hedge-fund activities.
His memoir suggests that some of Cramer Berkowitz's profit came from
clever trading. The $300 million fund might execute hundreds of
trades a day, some of them a bit gimmicky. Cramer describes how
they'd find a stock in which selling had petered out, then build a
position. Next, they'd hunt up some bullish news on the company and
feed it to sellside analysts and reporters. On the subsequent rise,
Cramer could profit by selling out his position. "Buzz
merchandising," his book calls it. Smart and effective, but
definitely not in the fuddy-duddy style of Graham & Dodd.

In December, Cramer made a video for TheStreet.com describing the
ways his hedge fund had used tricky trading techniques. He said
hedge funds could pass negative rumors to "bozo" reporters. When the
video circulated through Wall Street and caused an uproar. Cramer
said that he'd only been talking hypothetically, to blow the whistle
on the hedge-fund industry's bad actors.