Stop misinterpreting my words! That's how I feel about the debate I seem to be having with everyone about the Federal Reserve's role in this stock-market rally. First, it is undeniable that the Fed allowed individuals and corporations to refinance, and that's been a gigantic part of what has allowed people to buy stocks and homes, and what has allowed corporations to buy their own stocks and pay bigger dividends.
I am stipulating that that's been a very important piece of the puzzle.
By keeping money easy, the Fed has encouraged the buying of equities in part as bond-market substitutes. Companies' stocks often yield more than U.S. Treasuries do, and the tax treatment of dividends remains superior and more bountiful than that of ordinary income or bond-market interest payments.
The Fed has also created a very helpful investment climate by making it clear that it isn't about to stop its bond-buying any time soon, unless unemployment makes a quantum leap right now to 6.5%.
So I am in agreement with all of those who would say that the Fed has been an impetus, or the most important impetus, to this giant market move.
Anyone who thinks I am arguing against that view has neither read my columns nor watched me in the last five years, as I have said over and over again that you have to get out of bonds and into stocks while this period lasts.
Now, though, here is where we differ. First, the "while it lasts" comment means that, as long as we can make as much money as possible during this benign Fed period, it is worth it to try, even though it will have to end one day -- and when it ends, it could end badly.
This is a version of the Nasdaq run from 1000 to 5000, when I said there was a once-in-a-lifetime opportunity to make money if you were willing to accept that you might not get out at the top and would have to give some back when stocks got near the top or over it. In other words, I am a huge believer that you won't catch the top in pretty much any stock or a stock market, but that if you decide to be disciplined, you can get out with some very big winnings. However, if you don't play at all, you aren't going to make anything. In my world, if you sit things out because one day it must end, you are committing the sin of passing up what might be a once-in-a-lifetime opportunity.
More important, unlike that 1996-to-2000 run in the Nasdaq, for many of the companies that are doing well, the stocks are not expensive on an earnings basis, even unaided by the lack of serious competition from a bond market boosted by Fed chief Ben Bernanke. That means, to me, the risks are much lower that what we will see a precipitous decline if or when it does occur. That, in turn, makes it even more imperative that the rally not be blindly dismissed by theoreticians who are so easily pushed into saying disaster lurks.
Let's put it in arithmetic terms. A huge number of high-quality, high-growth companies sell at 13x earnings or less. So, if the Fed becomes tight overnight, the risk of a horrible selloff isn't as big as it would have been if stocks were selling at 19x, 20x or 21x earnings and the companies were growing slowly.
So I put that in my calculus and I say that, maybe 7% to 10% above the current level, I wouldn't like the odds as much as I do right now. However, if stocks were to rally by that much, and if the Fed tightened radically, how would I know stocks would even fall so much that they would give up that whole 7% to 10%?
That's why I say the only people who don't need to be in right now are the people who either don't invest, or who are so rich that they don't need to risk anything, because you only need to get rich once.
These are the most vociferous people who oppose me.
If that eludes you, I think you can simply say, "OK, I know the Fed's helped, but if the companies hadn't done well, if they had poorly executed, if they didn't take advantage of what was out there, then it wouldn't have mattered anyway."
You see, the companies play a big role in this. They have returned capital and done the right thing by you. They didn't need to do it. They didn't need to do what was done at Wyndham (WYN), the No. 1 performing stock from the bottom four years ago -- which was to return almost every single excess penny in the form of higher dividends and big stock buybacks. That company could have screwed it up. It could have failed to listened to its customers or failed to come up with better mouse traps or been beaten by foreign companies or driven into the ground through recklessness.
Bernanke didn't provide the smarts, and he didn't provide the execution. He just created a backdrop that allowed the companies with good management teams and good businesses to prevail.
You wouldn't have bothered to access stocks or buy stocks, though, if you'd thought from the get-go that this all had to end someday. You would have avoided stocks the whole way, or from any level at which you'd heard these jeremiads. That's what I am so darned angry about.
I would love to hear one of these people say, "I know my view would have kept you out of stocks for the last 1,000, 2,000, 3,000, 4,000 or maybe 5,000 Dow points, and now I even doubt if we would give up those points if Bernanke left right now, but I do think it should be on your radar screen at some point."
Is that too much to ask? Is that too much for someone to admit?
These people have been the enemy of your personal wealth creation. They have kept you from taking that opportunity, and they have no humility at all about it, no remorse, nothing. They simply don't think it counts or matters that you could have made that money and, worse, they think that those gains are ill-gotten.
Let me leave you with this: Ill-gotten gains are gains that are stolen, expropriated or looted. The stock-market gains? They are legitimate, accepted at the bank and at fine retail stores everywhere.