Cramer's Analogy to Poker is Brilliant

from www.madmoneyrecap.com

'High Stakes'
The market... it's just a big game of poker...If you think of it as poker, then I think you'll understand... You've got to see the stocks as emotional looks on the players faces... But, just like in poker, where people's faces bluff all the time, stocks don't always represent reality in their ups and downs... It's the actual cards underneath... the way a company's actually doing... it's earnings. They often tell a different story... a different story from the way the stocks act. And sometimes you can read it from the players' faces...You see, not every stock has a great poker face. If you know how to play the game - how to read stocks like poker faces... how to anticipate if players are bluffing... how to ultimately discern what those cards they're holding are... the true state of the business... then you can make a killing.If Wall Street is a game of poker, then who are the players around the table?...First, you've got the individual stocks, and the people behind them... those are the managements of the companies... they obviously want their stocks to go higher, right?... These guys know the hand they've been dealt... they know the suit and the numbers on their cards. See, they've got a good look...Standing off to the side are the analysts... The analysts, at all times, are trying to figure out what those cards are that the company has... They want to read the faces of the managements that come to the table, in order to get the answers, because they're not allowed to see the cards... That's Regulation FD... They don't know the cards... And then there are the hedge funds... They're always trying to play the next move of the cards of these fellows... And there's the Fed...Now the Fed... they don't have any cards at all. They get to see everyone else's cards, and they get to make judgments about the game itself. And yes, the Fed can change the rules accordingly...You see, the Fed is the casino. They're the house...Bernanke, the (Fed) chairman... he's the pit boss... He can change anything. He can even remove the players. He can change the rules like that.And then there're the guys like you and me...We're trying to take it all in, trying to figure out what's really going on at the table, so we can make money at home...So, let me tell you how I approach Wall Street poker... I like to remember all the cards on the table, and before this hand... I like to remember all the past hands and how the players played them.I like to know who was telling the truth in the past, and who was bluffing... who's got a good poker face and who doesn't.Sometimes it's easy...The biggest gainer today that everyone was talking about... it was easy.For three weeks now. A guy who's never bluffed... A man who has played his hand straight every time, John Chambers , the CEO of Cisco (CSCO)... a stock we like very much on Mad Money... made it very clear not once, not twice, but three times that he had a fabulous hand!He gave an interview to the Financial Times that basically said it was the greatest time ever for the networking companies... And then, right before his quarter closed... the one he just announced last night... Chambers announced a huge buyback. Well, you don't really announce a buyback, right, just five days before the end of the quarter, unless you know it's really good. That was like a neon sign, saying I've got great cards...And then, as if to not say enough, how fabulous this man's hand was... he gave one more interview to the Wall Street journal just this week, saying that CSCO's business is exploding...Yet, the whole time, what did the stock do? The stock did nothing.You see, people thought he was bluffing... people thought Chambers didn't have the cards... Well, he turned out to have a full house. He showed them last night. He showed them again this morning... CSCO's not done going up. That was a great hand.
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And then there's Under Armour (UA)...Now here's a company that had in the past been very self-promotional about its business. I mean, really, frankly, pretty much saying all the time that things were good, that they had real good cards... and then the cards were just okay...This time around, though, the guy played with a door face... I mean, you would have thought people stopped using his apparel... that was how quiet he was.Sure enough, this time UA had a straight flush... I didn't even think he realized he had it, coming right to the very end.
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Then, there are the Cokes (KO) and the Pepsis (PEP)...Well, you know these guys right?...They play with their cards facing outwards. You always know where they stand...They have three-of-a-kinds, always... I love it.Now, remember, three-of-a-kind is not enough to win all of the time, but it surely is enough to keep their stocks flying toward 52-week highs... especially in a market where we're worried about the cards of so many other players... KO and PEP... We think they're fabulous on Mad Money...
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And that brings us to the financials...Now, the financials... they really have got some crummy hands... I mean they have had just the crummiest hands. Just awful... just pulling nothing.They sit there every day and they just keep folding. They don't have anything to work with. They're not even bothering to bluff anymore.The financial stocks are so down about it, and their managements are so down, that the hedge funds, who are at the table, read their faces, notice their fears... They keep taking and deciding that these are layup guys to bet against... The hedge funds just press these bets every day, right? I mean, every day, for the last two weeks, you saw these stocks go down... the banks, the brokers, the homebuilders... stocks I've been telling you to steer clear of...They just keep getting these junk hands... and the big bet that they will fold keeps paying off...And then one day... yesterday... the Fed - which you'll remember can change the rules at will anytime - looked at the cards these financials had, and said, you know what? We've got to calm things. We've got to give people some confidence in these guys... We know these guys keep getting a lot of two and threes, with suicide kings and one-eyed jacks...Well, you know what?... Let's make twos kings, and one-eyed jacks wild! That's what the Fed did...Suddenly, the hedge funds, which were betting against the hedge funds like there's no tomorrow, and killing them almost every day, got fooled out of their shorts!The banks and the brokers are still playing the same shoe... they're still getting dealt twos and one-eyed jacks and suicide kings, except this time, it's the hedge funds that are committing suicide...Shorting the financials had been like shooting fish in a barrel, but so many hedge funds shorted them, that even the slightest bit of not-awful news from the Fed was enough to squeeze those shorts and send the financials higher...
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So, what's my takeaway from the big poker game?...First, CSCO's got the hottest hand. And so will its brethren in tech.Remain 'all in'... The pin action in CSCO is good. It's enough to put a couple of bucks on Amazon.com (AMZN), Google (GOOG), eBay (EBAY)... a 52-week high there, because the web's exploding... and I'd put some money on Level 3 (LVLT) too, because streaming video is on fire. We learned that from CSCO, and they provide the bandwidth to get it...
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How about the Cokes and Pepsis?... You can't bet against these guys. They're too consistent.They're great players with great cards, even though we know what their cards are...

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Ahh... the financials.Soon, the shoe will run out for the financials again. The Fed won't keep those cards wild for long. These are bets now on whether the hedge funds will have short squeezes and go belly up, not the financials.The rally (in the financials) might be tempting... In might look like a bottom to you, but you have to know that it's probably not...I think the financials aren't good bets at this point... We don't know when the twos start being twos again, and the kings and jacks just become part of a hand that's hard to make a lot of money from...

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Okay, now you know the rules, you know the game, you know the players... and you know how they behave.Welcome to the high-roller's table. Tech's got the good cards.PEP and KO always have fine cards.And the financials got lucky...
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The bottom line!: Stick with hot hands like Cisco (CSCO) in tech, that are more than willing to telegraph their success... Stick with the solid secular growth names like Coca-Cola (KO) and Pepsi (PEP)... But, when it comes to the financials, remember... Kings, Jacks and Twos will not always be wild...
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