Foundation of the Rally Built to Last

 | Feb 01, 2013 | 6:46 PM EST  | Comments
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Milestones do matter, if the milestones are reached based on something substantive, and there is nothing more substantive than healthy payroll growth, as we had today.

The actual number added, 157,000, plus the revisions, puts us in a solid position to go to all-time highs and beyond and I think we will do just that. And, we will do it much faster than most people, including many of the featured writers on our Special Super Bowl Weekend, expect.

That's OK. Real Money has never been known for its uniformity and I have always felt that its hallmark of duking it out and squaring off makes you a better investor.

As part of some longer-term work I am doing in conjunction with a review of Action Alerts PLUS for the last five years, I have been honing in on what data, what numbers, what pieces of evidence have staying power vs. what inputs are relatively meaningless, even as they seem to have terrific import.

I started with the presumption that there were dozens of indicators, numbers and quarters that could have meaning to the market. I tracked each one through the last five years to see if the moves subsequent to them had any real oomph behind them.

It was a shocking exercise. The only one, and I mean the ONLY one, that mattered was employment. Moves that began when employment turned up or seemed to turn up -- employment as expressed by the payroll numbers -- showed meaningful staying power.

Nothing else, not PMI, not retail sales, not durable goods, not consumer or wholesale price data, not Fed minutes and not any particular quarter or quarters, even from stocks we all track as bellwethers.

The consistency of it was astounding. The beginning of the unraveling of this market after we hit the highs came after the hideous payroll data, sharply worse than expected.

When subsequent numbers and revisions confirmed the weakness, we got hit again. And again. And again.

We did not get stabilization in the market until we saw a deceleration in the rate of joblessness. The bottom, literally, was put in when we got several consecutive payroll numbers that simply weren't as bad as the last ones.

The upswing began in earnest, again, in lockstep with better employment numbers. It was almost uncanny how simple it all was. You could tune out every other piece of data.

That's why I believe these Friday numbers will create a foundation that is built to last.

The conditions are about as bountiful as they were parched when we visited these levels on the other side last time. The multiples are appreciably lower and the earnings power tested in much leaner times. Try as the bears might say, the bond market's competition is nil. Some negativists are trying to say that the stock market will somehow be dinged by a takeout of the 2% level on the 10-year. I think that's fanciful. One hundred basis points higher won't damage a tape that is founded on employment growth.

I know there will also be people who are so Fed-centric that they will regard the employment number as somehow a negative because we might "lose the Fed."

Nonsense again. Sustainable rallies, at a certain point, don't need the Fed. We just need earnings and dividend boosts and a clear path for global growth. We are on the verge of that.

The one thing that is indeed different this time is the lack of stock available for large accounts to buy.

Many have tried to make heads or tails of retail investors coming back. To me, the nascent return, the one we have seen since 2013 began, means nothing. Because of the buybacks I don't think it will take that much additional firepower to take us higher. Companies will compete in a meaningful way with these buyers as the cash they have on hand doesn't really have another home.

I am sure to many this whole thesis is antithetical. The endless tarring and feathering of the bulls for not understanding either the tape or the macro doesn't disturb me. That's because the rejectionists will ultimately provide the fuel we need to go another 1,000 points in the Dow, if not more.

Let me leave our Super Bowl weekend extravaganza readers with one last thought.

Sure, we are supposed to bet against retail. That's ingrained. But you don't bet against them in one month. Maybe not even one quarter, or even a year. Yes, it has been that long since retail's been in stocks.

But the most negative cohort has been the analyst community. Stephanie Link, co-portfolio manager of Action Alerts PLUS, and I marvel almost every day at the downgrades. They downgrade on valuation. They downgrade on macro concerns. They downgrade on a revenues being light, even if the bottom line is terrific.

They downgrade on anything.

They are the ones who are going to be dragged back kicking and screaming. You want to know when to sell? When those who downgraded here begin upgrading.

Talk to me then.

Maybe then I will be the one who downgrades. But certainly not here. Not now. Not with this fundamental base at last in place. Built to last, people. Built to last.

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