Jim Cramer v. SMB Capital

I happened to catch Jim Cramer and Jeff Tomasulo from SMB Capital on CNBC today. Both were asked the question of whether Citigroup was a buy today at $3.15.

Cramer is typically a lightening rod in more among pro and pro-am traders. Traders love to poke fun at his erroneous predictions. His trading strategies demonstrated on Mad Money are considered to be for dumb retail investors.

Cramer recently mentioned to buy Citigroup at $3.25 as a long term buy. Today he characterized it as a call option. Jim’s theory is pretty simple. Citigroup is out of the danger zone of going to $0 with this capital raise. It is only a $3 stock with limited downside. Meanwhile, even if it only goes back to its September high at $5 it will be a big win. You don’t even have to dream about Citigroup going to $25.

I don’t know much about SMB other than their blog that I check from time to time and their presence on Stocktwits. I can objectively say that SMB’s trading strategies are more sophisticated than Jim Cramer’s strategies. I don’t know anything about SMB’s trading record.

So let’s call Cramer a retail trader (ironic since he is the ultimate insider, but I’m talking about the style he promotes on CNBC) and Jeff Tomasulo a sophisticated trader.

Tomasulo’s opinion of Citigroup on CNBC was that he thought it was retail trader (and thus dumb money) thinking to buy at $3. The example he used was the retail trader thinking they’ll do great if it goes to $6. Tomasulo alludes to the fact that Citi could go down to $2 and lose 33%. That would be the same as a $30 stock going to $20. Yet, very unsophisticated retail traders don’t think in percentages.

Tomasulo thought there were better ideas out there. I’m not so sure.  He suggested buying Goldman Sachs at $160 with a tight stop at about $157. He thought that Goldman was a market leader during the rally and that if the market were to go higher it would not do so without Goldman. Makes sense and nothing original there. Many traders are tracking leading stocks such as GS and AAPL.

Tomasulo didn’t say it, but I assume he’s taking the GS trade using the December low as support with a stop loss using 1 day’s average true range which comes out to about 4 points (or something along those lines).

Generally, my trading style is much more similar to Tomasulo’s style than to Cramer’s style.

Yet when the segment ended I couldn’t help but think that Tomasulo was overthinking things and that Jim had the better trade.

It always sounds intelligent to say that you’ll take a shot on a trade and use a tight stop to limit losses (and it often is a good trade). Yet, this year, my personal experience is that wider stops would have been much better than tight stops. A trader with tight stops often gets stopped out  when support is temporarily overrun at obvious support levels. Of course, right after the stop out occurs, the stock tends to rebound.  It’s happened to me quite a bit this year when I’ve used the tighter stops. Over time, a bunch of small losses will add up to a big loss. Personally, I just have not found setting tight stops to work very well in this market.

On the other hand, Jim’s strategy is simple. Sure there is uncertainty with Citigroup, but with the additional capital and the payback of TARP, the stock is not going to $0. You make money betting on uncertainty. If there was certainty, there wouldn’t be opportunity. Basically, if anything happens to cause Citigroup to produce normalized earnings in the coming years, the stock will be worth more than $3. Other positive catalysts?  There could be a reverse stock split which might permit greater  institutional ownership. Citi might be broken up and generate some spinoffs (which are usually good for shareholders). And most importantly, the government is behind Citi too. Is there any doubt that the Obama administration desires to send out a positive press release touting all the profits earned on the Citi investment? We have learned about the power of the government in 2009. I want to be a part of that.

My point is that sometimes commonsense wins over technicals. I find myself agreeing with Jim that Citi is essentially a call option. It doesn’t mean that SMB’s Goldman trade can’t work too. I just think sometimes too much knowledge can cause you to miss the obvious.

Oh, any by the way, I’m looking at buying RIMM after the good earnings report. The stock is at $71 in after market trade. This is a cup and handle breakout above the 200-day SMA and horizontal resistance.  The September gap could fill taking this to $80.