"Investors Struggle to Digest Fresh Fears," blared the lead Wall Street Journal headline this morning. It took my breath away. Why? Because I think that ever since the great bull market of 1982 began, investors have been struggling to digest fresh fears -- including today, when the market opened down and then gained steam after that decline.
What's truly a shame is that this kind of story is the staple of so much of business journalism. It's a shame because there has been a steady departure of individuals investing in stocks in part because they don't understand that fears do get digested and when they do, stocks can go higher.
I want to take this chance to talk about risk and how stocks, per se, are risky assets. But you do not get reward without risk.
There are many kinds of fears -- and some are worth actually fearing. For example, in 2008, we had true systemic risk. It was not unlike the 1930s, when it did seem that all of our banks had come to the brink of disaster. Systemic risk must be avoided -- even if it means that you miss the beginning of a rebound that comes when or if the risk is resolved. There have been whole periods where a vast swath of wealth was wiped out (like in the 1930s). If you read Tim Geithner's book, Stress Test: Reflections on Financial Crises, I think it was possible that the vast majority of people with money in the stock market could have lost most of their savings -- if not, in some cases, all of them.
Another kind of fear is whether the mechanisms and methods of the stock market are fair. The high frequency trading risk to the market is always substantial and it hasn't been fixed. Given that there are still many unregulated pools and circuit breakers that might work and might not, a flash crash could happen again.
Plus, we know from all of the insider trading prosecutions the market invariably seems rigged. I don't think it is, but the prosecutions show, without a doubt, that the asset class is tainted. This is another justifiable fear. However, I do not think that the current set of fears rises to the occasion of systemic risk or even a flash crash moment.
Sure, we know that oil is high and could be going higher if the oil workers in Iraq walk off the job. Our government's inability to marshal natural gas as a viable alternative to regular gasoline -- simply as a way to promote energy independence -- makes it so we are still hostage to the Middle East. I said last week, that there have been several bear markets caused by Iraq and a jump in oil, so it is perfectly reasonable for our market to drop 2%, 3% or even 5% if oil increases 10%.
It's certainly possible -- given how the Iraqi government isn't all that impressive in terms of defending its people (to say the least), that the fields will get shut down. I think we got a reprieve today because Baghdad didn't fall. An end-around Baghdad to the oil fields, though, can't be dismissed.
Not that long ago, we had another set of fears about valuation. Put simply, we were very worried about the biotech and tech stocks that had lost their traditional moorings and were being overwhelmed by new supply. How many times did you hear that fear articulated? How many times did you hear that the overvalued stocks simply had to bring the rest of the market down? Did you ever, honestly, other than me, hear that the overvalued Nasdaq did not pull down the vast number of non-tech names in the 2000 dot-com crash and instead led to a flood of money into non-tech names?
Now here we are, after a peak-to-trough decline (in many cases, of 50% or more), where the rest of the market, the non-techs, continues to move higher while the trashed stocks, now recharged, work their way back up again. Yes, they are indeed going higher ever since Salesforce.com (CRM) reported and didn't get hammered. If you recall, the original decline occurred when Saleseforce.com reported a fantastic number, jumped from $66 to $68 and then began a long slog down to $49.
The company then reported still one more terrific number and this time the stock didn't go down; it rallied. That was the signal that the rest of the group could go higher. That happened simultaneously with the culmination of the wave of insider selling when the Twitter (TWTR) lock-up expired and the last of the floodgates opened. At the same time the IPO window slammed shut and the only deals that have gotten through are high quality ones, such as Arista Networks (ANET), which burst through the clutter.
Let's not forget the munificent nearly 50% gain rung up with Priceline's bid for Open Table (OPEN), or the absurd 239% premium that Merck (MRK) paid for Idenix (IDIX). When you get an e-commerce and a biotech bid in the same week, you want to cover your shorts before yours becomes the next one to be branded by the acquiring iron.
Of course, the final fear, which was stirred up, literally for years, by the ideologues who didn't trust the Fed, was that the decision to taper its bond buying program simply had to destroy the market. That turned out to be totally and completely wrong but no one who stirred fear along these lines has ever been held accountable. Man, I am held accountable for everything, including things I didn't do and statements I didn't make. Why are these people given free passes?
This is what really galls me though: "... as investors struggle to digest fresh fears" they are also getting a steady diet of good news that doesn't even rise to the level of something that gets digested. Aren't investors entitled to save the tasty morsel of deals like Medtronic's (MDDT) bid for Covidien (COV) that has that large capitalization stock up 20% today? Did anyone in the press taste the joy of the 70% increase in Hillshire Brands (HSH)? How about savoring the 18% gain that the shareholders of Williams Companies (WMB) got by taking a stake in Access Midstream Partners (ACMP)? That's right, the acquirer rallied that much. The bids for Time Warner Telecom (TWTC) and Fusion-io (FIO) aren't anything to sneeze at either.
I think that as long as the acquirer can boost its stock by buying a strategic asset, something that keeps happening, we are going to see more deals, not fewer ones. As long as the Treasury and Congress sit idly by and don't try to stop these tax-motivated acquisitions known as inversions -- and I have a ton of targets I will go over later -- how can the market not go higher on these deals?
So, as we try to digest fears, both justifiable and non-justifiable, please remember that's been the case for 15,000 Dow points. While we have seen systemic risk, I don't think that the fears the market is struggling to digest right now can bring it down to the levels we witnessed a few years ago.
I am mindful. I am not being blind to risk. I am simply trying to balance risk and reward and point out that over the long term, reward has most certainly won.