HOW HOT-MONEY GUYS GET BURNED

By James J. Cramer

East Asia is a hot-money area. Speculators move in and out of it with swashbuckling abandon. As in any once volcanic, now cold-as-ice market, when the selling gets to be so great, the leveraged speculators have to raise capital to meet margin calls on stocks they bought on credit. This week the in-hock guys with the worst balance sheets liquidated, and markets worldwide got banged.

When I was at Goldman Sachs, I traded stocks and bonds for a lot of hot-money guys. When markets started to go against them, these types often doubled down. When the markets continued to go against them, as happened in Hong Kong last week, they borrowed even more. And when the selling persisted, I would get a cheerless call from John, my brokerage group's margin clerk. He would say, "Your client has until 2 p.m. to get enough money on to meet his margin call before we sell him out." I would then call the ne'er-do-well and urge him to send any collateral he had. Sometimes he sent stocks, and I would cashier them pronto. I wasn't looking for the best price. I wasn't even working for the client. I was working for my firm, which wanted the cash. Other times, I just sold the stuff and closed the accounts. For good.

This week, around the world, brokers were working for their firms, jettisoning anything that moved. That's how you can get markets that don't rebound and stocks that go down, even though the fundamentals are just fine. Add the uncertainty of faltering Asian business conditions, and the selling makes all kinds of sense.

When will it stop? When it always does. When the last speculator gets hung out to dry and the patient buyers begin to step up to the plate. The market that always bounces back first is the country with the strongest bond market. And that would be? Hmmm, that's easy. The United States.

The author is a hedge-fund manager on Wall Street. Read more of his market wisdom at TheStreet.com