Assessing the Rise from the Grave of the BDCs

I have some particularly interesting investments for you to consider for your portfolio. Nowhere else are you going to find such an eclectic selection of both debt and equity securities. Would you be interested in senior secured debt of safety footwear manufacturer Shoes for Crews? Or how about some common shares of specialty trailer manufacturer Universal Trailer Corp. (see picture above)? No wait, even better. I have some senior subordinated debt from private school operator Instituto de Banca y Comercio, Inc. that I know you are going to love. How can you invest in these fabulous companies? Well, according to a recent 10-Q filing, if you buy shares of publicly traded Ares Capital (ARCC) you can become a part owner of these securities as well as a plethora of equally obscure ones.

Now, I don’t mean to disparage these companies. For all I know they are wonderful businesses run by masterful capital allocators who put the interests of their shareholders first and foremost. The problem is that there is just no way for me to assess the quality of these companies or the value of the securities owned by Business Development Companies (BDCs) like Ares Capital. This is the crux of the problem for the BDCs: very little transparency. When people talk about balance sheets that are equivalent to black boxes, they are often referring to those of the (former) investment banks such as Goldman Sachs (GS) that contain millions (if not billions) of dollars of hard to value Level 2 and 3 assets. However, as I began to peruse the balance sheets of the publicly traded BDCs it quickly became abundantly clear that the black box description was particularly fitting for these companies as well.

According to Wikipedia:

A Business Development Company or BDC is a form of publicly traded private equity vehicle in the United States. Historically, in the United States, there had been a group of publicly traded private equity firms that were registered as business development companies (BDCs) under the Investment Company Act of 1940.Typically, BDCs are structured similar to real estate investment trusts (REITs) in that the BDC structure reduces or eliminates corporate income tax. In return, REITs are required to distribute 90% of their income, which may be taxable to its investors.

In more benign times in the credit markets these vehicles were relatively attractive investments. They paid substantial dividends, gave investors enamored with the private equity model exposure to small and mid-sized companies, and often weren’t quite as levered as some other investment vehicles. Unfortunately, the recent dislocation in the credit markets as well as the growing concern about the value of private equity debt that was financed during the boom has absolutely decimated the BDC space. Specifically, the average decline from the 52 week high of the 10 BDCs I reviewed is 59.4%. This is after an astounding rise in the past few months that has brought these stocks, on average, up 220.7% above their 52 week lows. Accordingly, with such a large move off of the bottom I thought it would be interesting to check in on the BDC space to see if the share appreciation was warranted or if the BDCs’ business model had been made unsustainable by the events of the past couple of years.

This first chart illustrates the magnitude of the volatility in share prices for these BDCs over the last year. During the worst period of the bear market in March of this year many of these companies traded as if they were going out of business, with a number of them trading under $1. While it is seductive to look at a possible return to those 52 week highs and see potential 10 baggers, it is important to remember that those prices were reflections of a global economy and credit markets that were very different than they are today. Therefore, the most pressing question for interested investors is what is the new baseline for these companies going to look like? Assuming that we do not go back to the boom years of cheap credit and completely mispriced risk any time soon, how do you value the BDCs in a “new normal” environment?

6/18/2009
Ticker	Stock Price	52 Week High	% <>	52 Week Low	% > 52 Week Low
AINV	$6.44	$20.29	68.26%	$1.99	223.62%
ACAS	$3.27	$32.41	89.91%	$0.58	463.79%
ALD	$3.10	$19.99	84.49%	$0.58	434.48%
ARCC	$8.05	$13.00	38.08%	$3.12	158.01%
GAIN	$4.10	$9.04	54.65%	$2.26	81.42%
GLAD	$7.33	$19.14	61.70%	$4.72	55.30%
KCAP	$5.79	$13.41	56.82%	$1.24	366.94%
PCAP	$1.58	$10.43	84.85%	$0.88	79.55%
PNNT	$7.45	$8.64	13.77%	$2.09	256.46%
TICC	$4.15	$7.10	41.55%	$2.21	87.78%
Averages			59.41%		220.73%

This next chart compares the current valuation of these companies to their averages over the last few years. It should be noted that some historical valuation data is a bit limited because many of these companies became publicly traded only in the last 3 to 5 years (not surprising given the boom in private equity from 2005 to early 2008). In general these stocks trade on multiples to NAV. In the case of these BDCs, NAV is equivalent to book value per shares and tangible book value per share as none of these companies have any goodwill or intangible assets.

			2005-2008		Annualized
Ticker	NAV/Share	P/NAV	Average P/NAV	Recent Dividend	Dividend Yield
AINV	$9.82	0.66x	1.14x	$0.26	16.15%
ACAS	$12.32	0.27x	1.31x	$0.00	0.00%
ALD	$7.67	0.40x	1.42x	$0.00	0.00%
ARCC	$11.20	0.72x	1.05x	$0.35	17.39%
GAIN	$9.73	0.42x	0.88x	$0.12	11.71%
GLAD	$12.10	0.61x	1.46x	$0.21	11.46%
KCAP	$11.53	0.50x	0.88x	$0.24	16.58%
PCAP	$8.13	0.19x	1.45x	$0.00	0.00%
PNNT	$12.00	0.62x	0.70x	$0.24	12.89%
TICC	$7.46	0.56x	0.96x	$0.15	14.46%
Group Averages		0.49x	1.12x		10.06%

* Average P/NAV for AINV was calculated using fiscal year end price divided by fiscal year end book value

* Average P/NAV only includes 3 years of data for GAIN, 2 years for KCAP and 2 years for PNNT

*Sources: Cap IQ, Yahoo Finance, and my calculations

When you compare the average multiples prior to 2009 to the current multiples the wholesale contraction in multiples that the market is willing to pay for these companies becomes readily apparent. The concern that I have and that I believe is shared by many investors is that NAV is a moving target and it impossible to verify or reliably calculate. With so many illiquid private investments on the balance sheet, the BDCs have a tremendous amount of discretion in terms of valuing these securities. In his book “Fooling Some of the People All of the Time” about the alleged fraud at Allied Capital (ALD), hedge fund manager David Einhorn goes into great detail regarding the potential for valuation shenanigans and the problems that even very astute investors and regulators have in terms of spotting misevaluations. Accordingly, an investment in one of these companies is tantamount to a blind leap of faith that the management teams are trustworthy, conservative in their valuations and can manage a portfolio of obscure securities under very severe economic circumstances.

To highlight the problem in assessing the merit of valuation, I think it makes sense to go through an example. One of Einhorn’s major criticisms of ALD is that the company took way too long to write down the value of obviously distressed securities. In the book he discusses a number of occasions in which ALD wrote down the equity investment a company to $0 but still carried the debt at 100 cents on the dollar. While scenarios do arise all the time in which equity holders are wiped out but the assets on the balance sheet are sufficient to cover the senior debt, liquidations are often very uncertain and conservative managers should feel compelled to reflect that in the form of write down. What investors have to be leery of is a company that waits until a piece of debt either stops paying interest or becomes impaired before writing down the value of the asset even though there is ample evidence that the underlying business is struggling.

I found a great example of this difficulty in assessing the value of impaired securities in the recent 10-Q’s of ALD and ARCC. Both companies own the subordinated debt and some common shares of clothing company Wear Me Apparel LLC. Each company indicates in its filings that the debt security is non-income producing, a circumstance that indicates a write down is necessary.

Wear Me Apparel LLC
ALD
Security	Maturity	Cost	Current Value	% Write down
Senior Subordinated Debt	2013/14	$138,559	$46,932	66.13%
Common Shares	N/A	$39,635	$0	100.00%
ARCC
Security	Maturity	Cost	Current Value	% Write down
Senior Subordinated Debt	2013	$24,110	$12,055	50.00%
Common Shares	N/A	$10,000	$0	100.00%

The interesting to note about this chart is that even though both companies have written down their common shares to $0, ALD has chosen to write down the debt by 66% while ARCC has only written it down by 50%. Which company’s valuation is more accurate? The answer to that is impossible to know but even small differences can be meaningful when applied to a portfolio with hundreds of companies. This discrepancy in valuation is one reason why the market is pricing the BDCs well below NAV and illustrates why investors who are interested in buying these stocks should price in a significant margin of safety.

Accordingly, the logical question to ask is whether the current depressed valuations reflect the stress on the portfolios from the recession, the inherent difficulty of valuing the underlying securities and the lack of funding available for balance sheet growth as a result of the shut down in credit markets for private equity? Unfortunately, I don’t have a good answer to that question. But, as a result of all of the uncertainty that surrounds the companies’ balance sheets and funding model, it is just too risky a space for me to allocate my capital. There is no question that the dividend yields are attractive and investors who can identify the companies most likely to survive the cycle are essentially getting paid to wait for the economy to turn around and the credit markets to become less constrained. However, as the economy worsens a lot of the BDCs will be forced to write down their portfolios even further and potentially breach debt covenants that require minimum leverage ratios.

I personally don’t want to wake up one morning an see an 8-K from a company in my portfolio that indicates that as a result of a breach of a covenant on $2.3B in borrowing agreements the company’s auditor now doubts that the company in question can remain a going concern. This is what happened to ACAS. Despite that the stock has run up from a 52 week low of $.58 all the way to $3.27, an amazing 463% appreciation. This is the type of thing that makes me skeptical of the current valuations, no matter how depressed they are. Accordingly, I am content waiting on the sidelines to see if the best in class of these companies (likely AINV) trade down to prices that provide an irresistible margin of safety or optionality. As a result I may never have the pleasure of being a part owner of the stock appreciation rights of ALD’s portfolio company Oahu Waste Services, but at least I won’t be up at night worrying about what the effect of the recession in Hawaii is going to be on my portfolio.

(Picture courtesy of http://www.universaltrailer.com/)

IPCR: Scuttled Deal Provides an Opportunity

Over the last few days the strange love triangle between IPC Holdings (IPCR), Max Capital (MXGL) and Validus Holdings (VR) has gotten even more convoluted. For those of you who have not been following this story, here is a brief timeline of the recent dramatic and even Desperate Housewives-worthy events:

March 2nd, 2009: IPCR and MXGL agreed to combine forces. The original agreement was for the group to maintain the Max Capital name under the following terms:
1. Holders of MXGL shares would receive .6429 shares of IPCR in a tax free, stock for stock merger
2. IPCR shareholders would then control 58% of the combined entity with MXGL shareholders holding the remaining 42%
3. The deal was set to close sometime in the 3rd quarter 2009.

MXGL closed at $16.20 on 3/2 and proceeded to drop all the way down to $14.47 by the end of the day on 3/3. IPCR closed at $24.69 on 3/3 and then also dropped the next day to $22.28. Based on the closing prices at the end of the day on 3/3, the deal valued MXGL at $14.32 per share (.6429* $22.28).

March 31st, 2009: IPCR acknowledged the receipt of an unsolicited letter from VR outlining a proposed transaction. The company stated that it would review the letter but would not comment further until having done so. The offer from VR would have provided 1.2037 VR shares for each share of IPCR. Based on the closing prices on 3/30 the offer valued IPCR at $29.98 (about $1.68B) and offered an 18% premium to the closing price of $25.41. In the letter to IPCR, VR and its advisers highlighted a number of reasons its offer was superior to the MXGL-IPCR tie up, including low leverage ratios, a stable investment portfolio with few investments in “alternative assets”, and a global underwriting platform.

April 7th, 2009: The IPCR board unanimously approved the deal with MXGL and reaffirmed its recommendation that shareholders approve the deal. In the press release IPCR Chairman Ken Hammond stressed the benefits of the deal with MXGL and suggested that the fact that the MXGL would close faster also made it preferable to the VR offer. Also, in a letter to VR Chairman and CEO Ed Noonan, Hammond outlined some additional reasons for rejecting the offer:
1. The VR offer failed to meet IPCR's diversification goals that include moving into less correlated risks
2. The fact that VR's stock price at the time was near the high end of the 52 week range could lead to downside for IPCR shareholders.
3. IPCR was concerned about VR's exposure to catastrophe losses and the subsequent impact on earnings per share and the share price
4. The MXGL deal would have to be rejected by IPCR shareholders before the Board could conduct sufficient due diligence on the VR offer

April 15th, 2009: IPCR and MXGL announced that the Federal Trade Commission and Antitrust Division of the US Department of Justice had reviewed the transaction and granted an early termination of a required waiting period. As a result IPCR stated that the deal should close in June with all the necessary regulatory approvals.

April 30th, 2009: VR decides to take its hostile bid directly to IPCR shareholders after the IPCR Board had rejected the deal. VR also took the occasion to urge IPCR shareholders to reject the MXGL deal.

April 12th, 2009: VR commences an exchange offer for all of the outstanding common shares of IPCR, continuing to offer 1.203 shares of its own stock. At this point VR was trading at $23.68 (on 4/13), implying a $28.49 value for IPCR. IPCR closed on 4/13 at $27.41.

May 18, 2009: After filing an application with the Supreme Court of Bermuda on 5/12 to allow a meeting of IPCR common shareholders, VR increased its offer on 5/18. Under the revised terms, VR offered $3 in cash and 1.1234 shares of VR for each share of IPCR. Based on the closing price of VR on May 15th, the new offer provided IPCR shareholders with $30.14 of compensation for each share, a 13.2% premium to the 5/15 closing price of IPCR and a 21.9% premium to the closing price on 3/30.

May 22nd, 2009: IPCR's Board indicated that it still did not feel VR's offer represented a superior proposal to the MXGL deal. VR then issued a press release stating that it was both surprised and disappointed by that conclusion. Along with re-affirming the belief that its offer provided IPCR shareholders significantly more value than a merger between IPCR and MXGL, VR continued its assault on both IPCR and MXGL for what it deemed as false, inconsistent, and misleading statements regarding its offer.

June 10th, 2009: VR announced that RiskMetrics, an independent proxy voting group, had recommended that IPCR shareholders reject the MXGL merger. Also, VR took this opportunity to revise the deal once again, this time increasing the cash portion to $3.75 per share from $3. The total consideration at this point was $30.36, a 12.5% premium to IPCR's closing price.

June 12th, 2009: After IPCR's shareholders voted down the merger with MXGL, MXGL terminated the agreement for the two companies to merge.

So, after all of the dancing, name calling, and deal revising, where are we today? According to today’s press release from IPCR, after entering into a confidentiality agreement over the weekend, IPCR Chairman Hammond sent VR a letter outlining the necessary criteria for its Board to be willing to consider a tie up with VR. Apparently even after all the acrimony (but only after the MXGL deal got summarily voted down—72% voted against it), IPCR is now willing to enter negotiations with VR.

“We reached out to Validus last Friday, June 12, to discuss terms for a negotiated transaction at a price acceptable to IPC. As the primary consideration offered to IPC shareholders is Validus stock IPC needs to perform due diligence on Validus. Over the weekend, IPC and Validus entered into a confidentiality agreement. IPC provided Validus with our initial due diligence request, retained advisors to assist us in the due diligence process and began work.”

“Even though Validus has twice revised its offer in light of the fact that its stock has dropped 9% since its March 31 offer, Validus’s current offer continues to be at a significant discount to IPC’s book value. Our unaudited book value per share is approximately $35 at the end of May and the implied value of Validus’s present offer as of June 12, 2009 represents a 16% discount to that value. Validus can now expedite the process by negotiating a transaction at a price that adequately reflects IPC’s value. We would require that any negotiated transaction with Validus would give IPC the right to perform a proactive market check between signing and closing.”

Mr. Hammond also indicated in the letter that he expects VR to be willing to pay the $50M break up fee associated with the failed MXGL merger. Not to be outdone, today VR issued a press release indicating its willingness to replace portions of the IPCR Board if it is unwilling to agree to the current offer. The proposal is to solicit IPCR shareholders to call a special meeting in which they could elect three of VR’s nominees to the Board. The nominees include Fuqua Professor Raymond Groth, former Ontario Municipal Employees Retirement System CEO Paul Haggis, and Senior Advisor to Irving Place Capital Partners (formerly Bear Stearns Merchant Banking LLC) Thomas Wajnert.

Ok, you got all of that? Now you ask, since I am not a merger-arb specialist and not a person who speculates on potential deals, why am I interested? The reason IPCR at the current stock price is intriguing to me is based on the quality of the company and not the potential buyout. IPCR is trading at .85x tangible book value despite having $122M in net cash (no debt) on the balance sheet, an attractive 3.15% dividend yield, a consistently low combined ratio, a conservative investment portfolio, and substantial gross redundancies when it comes to loss projections.

Below I have included an updated chart from my original article on the insurers/re-insurers:

Company Name	Ticker	Stock Price	Current P/TBV	2003-2008 AVG. P/TBV
Axis Cap Holdings	AXS	$25.69	0.87x	1.44x
Ace Limited	ACE	$43.77	1.34x	1.95x
Aspen Insurance Holdings	AHL	$22.73	0.72x	1.32x
Allied World Assurance Company	AWH	$39.29	1.00x	1.16x
Endurance Specialty Holdings	ENH	$28.07	0.87x	1.30x
Montpelier Re Holdings	MRH	$13.74	0.84x	1.31x
Everest Re Group	RE	$70.09	0.92x	1.41x
White Mountain Insurance	WTM	$207.01	0.72x	1.51x
Group Average			0.91x	1.42x
IPC Holdings	IPCR	$27.80	0.85x	1.04x

As the chart indicates, IPCR is trading at a discount to the current group average and to its 5 year average price to tangible book. This is despite being the company that I identified as being the best in class out of all of the ones I looked at. I believe the stock has not traded up closer to tangible book value due to the obviously very unpopular proposed merger with Max Capital. Now that the MXGL deal is not weighing on the stock, regardless of what happens with VR, there could be some upside in the near term. However, as always my focus is on the longer term and is the valuation and solid historical performance are the reasons that I would be comfortable owning the stock at the current levels.

My view is that for 85% of tangible book value investors can purchase a very formidable insurance company that will continue to grow book value through its profitable underwriting. Aside from a very bad year in 2005 in which IPCR sustained substantial losses from Hurricane Katrina (an unheard of 251% combined ratio), the company has had a combined ratio that is the envy of many of the firms in the industry. If the past performance is any indication of the way IPCR will perform in non-major catastrophe years, it is hard to argue that the current valuation is justified, especially in comparison to peer valuations. (For those of you who want some more detail on why I believe IPCR is the best in class check out the Scribd document below that includes more extensive charts and data)

In addition, I believe the current valuation gives investors a free call on an accelerated realization of value when it comes to the VR acquisition offer. As it stands right now, with VR trading at $22.52, the deal on the table values IPCR at $29.05 versus the current share price of $27.90. Since it only offer a 4.1% premium to the current price and IPCR management has vehemently stated that it would not agree to be bought out below book value, there is no question VR may be forced to increase its bid once again. Now that the companies are in more formal negotiations, it is possible that they can end the contentious nature of the past discussions and work towards a mutually beneficial agreement. As an example, if VR were to offer Q1 2009 book value of $33.09 (keep in mind that IPCR management indicated that un-audited BV for May 2009 had increased to $35 a share) for each IPCR share, that would imply a 18.6% premium to the current price. Since the companies are already in negotiations and VR continues to make it very obvious that it is interested in a tie up, it would not be a surprise to see a deal agreed upon sooner rather than later. In that event the annualized rate of return based on buying today could be quite substantial.

I would be remiss not to mention that there are some risks here. I happen to believe that the entire market is somewhat overvalued so there is certainly some market risk inherent in shares of IPCR and VR. The good news is that there is an offer for IPCR on the table that could mitigate a fall in the share price. That being said, the fact that the offer includes a large component of VR shares means that the price goes down as shares of VR go down. Also, any deal could fall through due to all of the previous acrimony, combined with the uncertainty in the economy today and the potential that IPCR is looking for too rich a price. Therefore, investors should be prepared for some volatility in the stock price of IPCR in the case negotiations with VR fall apart and should be comfortable owning the shares at this valuation without any expectation of a buyout. Finally, I believe there is some legitimate reason to be concerned about the management team. Obviously the Board badly misjudged the shareholder’s willingness to approve a merger with MXGL and has done a very poor job in evaluating the VR offer seriously. Accordingly, there is no way to be sure that the current Board has the shareholder’s best interests in mind.

In conclusion, while there are a number of risks and uncertainties regarding IPCR right now, it seems to me that the risk-reward profile is pretty attractive for investors with a long-term time horizon or a predisposition to playing the merger-arb game.

IPCR Quick Idea

Publish at Scribd or explore others: Finance Business & Law mxgl IPCR

The Official End to the Bear Market Rally

Jim Grant of Grant's Interest Rate Observer did a spot on CNBC this morning in which he discussed the fact that apparently 15 out of 16 primary government bond dealers are under the impression that the Fed will not move on interest rates before the end of the year. Grant hinted that the magnitude of unanimity often suggests that the consensus is bound to be wrong when all is said and done. Broad based agreement of this sort is what I would call a contrary indicator. When sentiment is so decidedly flowing in one direction it is often a signal that the tide is about to turn. As many stock market investors know, the time to get out of a position is often when everyone has jumped on the same bandwagon.

Now, I don't have a particular view on whether or not the Fed will raise interest rates by the end of the year. However, the contrarian in me is always looking for reasons to go against popular sentiment. Many of the most successful value investors have a contrarian bent. The strategy of being greedy when others are fearful is a universal contrarian mantra that entails looking for opportunities to go against the investing herd.

A quote from one of my favorite investors, Howard Marks of Oaktree Capital, encapsulates this point of view perfectly:

“I’d define skepticism as not believing what you’re told or what “everyone” considers true. In my opinion, it’s one of the most important requirements for successful investing. If you believe the story everyone else believes, you’ll do what they do. Usually you’ll buy at high prices and sell at lows. You’ll fall for tales of the “silver bullet” capable of delivering high returns without risk. You’ll buy what’s been doing well and sell what’s been doing poorly. And you’ll suffer losses in crashes and miss out when things recover from bottoms. In other words, you’ll be a conformist, not a maverick; a follower, not a contrarian.”

Have you been getting technology stock tips from your cab driver? Then it is probably time to sell any high fliers in your portfolio. Have you heard about all the great condo flipping opportunities there are from the guy who parks your car? Then it is likely time to postpone buying that condo in South Beach you have always wanted. Has your hairdresser been extolling the virtues of gold and hard assets as potential offsets of inflation? Then it might be prudent to lighten up on shares of GLD. Not to be facetious, but by the time non-professional investors have picked up on market trends it is very likely that they are close to running their course.

In the mass media today the ultimate contrary indicators are the opinions of the much maligned Jim Cramer. For those of you who have not had the unique pleasure of being exposed to Cramer, he hosts a show on CNBC called Mad Money. It is basically the Sesame Street of investing for adults, complete with funny sounds, props, and a cartoon-like character (Cramer himself). Would you accept investment advice from Oscar the Grouch or Cookie Monster? No? Then you probably should not listen to Cramer either. The problem is that millions of people tune into his show each week (apparently close to 380,000 a day) and get what I would call capricious and short-term focused advice. Cramer’s stock selection criteria and strategy are anathema to value investors. Accordingly, the poor man is the butt of many jokes on the buy side (hedge funds). In fact, if you ever are within an earshot of a fund manager who learns that Cramer has recommended one of his or her positions, the likely response from the manager will be something on the order of: “Cramer likes it? I better start looking to sell.”

If you are interested in analyzing Cramer’s stock picking prowess you can read this piece entitled “Shorting Cramer” in Barron’s from 2007 that suggests his picks underperformed the S&P meaningfully over the period reviewed by the magazine. Or you can review this recent study entitled “Investing in Mad Money” by Northeastern professors of finance Bolster and Trahan (who obviously have WAY too much time on their hands) which concludes:

“The full period results provide little compelling information that Cramer’s recommendations are extraordinarily good or unusually bad…Thus, we find inconsistent evidence of Cramer’s ability to add value through security selection.”

So, why am I picking on Cramer now, you ask? Doesn’t he receive enough criticism as it is? In all honesty I have nothing against the man. I actually feel a little bit sorry for him. But I sure wish he would stop making grandiose proclamations about the market. Case in point, here are some excerpts from an article entitled “The Bear Stearns Bull” published in New York Magazine on March 21^st, 2008, right after Bear Stearns failed and the S&P was over 1300:

“We’ve been through dozens of false bottoms, but this time, with the Fed and Treasury basically saying they will do anything it takes to save the system, you finally have a floor that can hold the weight of America’s savings. Mind you, I don’t think we’ll have a meaningful rally up from the current levels until we’re closer to the election (the uncertainty of an election almost always means we go nowhere). But now, at least, I feel the bear has been tamed, and the worst of the clawing is over.”

Sorry Jim. That bear continued to claw away at the market and brought it all the way down to 666 less than a year later.

“But the JPMorgan-Bear deal eliminates the prospect of the mortgage crisis’s taking down any other institutions, because JPMorgan went up the equivalent of $15 billion right after it pants’d the Fed and Treasury.”

Wrong again Jimmy boy. Ever hear of Lehman Brothers? Well, the mortgage crisis brought that down and probably would have done the same thing to Citibank (C) and Bank of America (BAC) too if the government had not stepped in again.

“I don’t know a soul who’s predicting an immediate end to the national decline in home prices. But I think that the upticks in the stock market, particularly in banks and home builders, are foretelling the truth: The worst will soon be over.”

Unfortunately housing has continued to drop for more than a year since then and we are still not even sure the worst is over.

Don’t get me wrong. A lot of people have underestimated this crisis. Many people much smarter than me invested in stocks after Bear collapsed and even after Lehman went down in anticipation that the declines in value were just temporary. In addition, within my own portfolio I have not navigated these treacherous waters as well as I would have hoped. It is a lot harder to be a contrarian and keep your emotions in check when it feels like the world is ending. But the difference between Cramer and I is that I am not presumptuous enough to think that I know what the bottom of a market looks like and I certainly would never suggest that anyone buy or sell a stock based on my prescience.

Unfortunately, he is at it again in an article entitled “Thank Bernanke” published on June 5^th in New York Magazine.

“The soft-spoken academic who has toiled in the shadows of his legendarily self-promoting predecessor, Alan Greenspan, will be known as the man who averted the Great Depression Two, a sequel that could have eliminated the United States as a world financial superpower and reduced us to this century’s Britain.”

Any investor who is bullish at all about the world economy and stock markets should shudder when they read that Cramer has given the all clear signal. If his ability to analyze the depth of the crisis in March of 2008 is any indication, we may be very far from a bottom now.

“He (Bernanke) went on 60 Minutes. We may not have known it at the time (unless you’re a financial type, his appearance wasn’t exactly riveting), but when we look back at the beginning of the new bull market of 2009, the one that has taken prices up 30 percent from their bottom, we will discover that Monday morning, March 16, the day after Bernanke sat down and talked to us straight about the jam we were in, was a seminal day.”

Poor Ben Bernanke. Not only is he stuck with rising Treasury yields despite his attempts to keep them down, but now he has been jinxed by Cramer. Being endorsed by Cramer is kind of like being on the cover of the EA Sports John Madden football video game. The Madden curse, as it is widely known, came about as a result of the player on the cover consistently either getting injured or having a terrible season after being selected to grace the cover. For the sake of all investors let us hope that Cramer’s magical ability to be completely wrong has dissipated and his recent call is not the ultimate contrary indicator that the world economy is in for substantially more pain.

Sorry, I couldn’t resist. If you haven’t seen this, it is a clip of Cramer on the Daily Show. Anyone who likes John Stewart will love watching him skewer Cramer.

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Jim Cramer Pt. 2
thedailyshow.com
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