It's one part benign Federal Reserve, one part dollar decline, one part possible Greek bailout and about five parts skepticism and negativity. That's the recipe for this kind of rally.
I know, right now, with the averages taking out old highs, it is difficult to believe that there is enough negativity and skepticism to go around. Yet I think there is, as I will demonstrate, and that pessimism may be the most crucial ingredient to baking a rally cake. Especially when you infuse it with a worry reduction sauce that stems from a more benign news backdrop.
Let's start with this Federal Reserve meeting yesterday because, obviously, that's the proximate cause of the advance. If you listened to the press conference after the Fed statement was released, you might have said to yourself, isn't anyone listening to what Fed Chair Janet Yellen is saying? She's saying things are better, not great, and while there is a cost to holding off raising rates, right now, at this very moment, it is outweighed by the risks.
Only in a world where hotshot money managers who are underexposed to the market and political people who believe in a laissez faire form of government, is this commonsensical view derided. If I were Janet Yellen at the end of this press conference I would be tempted to go all "Super Bowl winning coach Bill Belichick," on the reporters and say something that he might say to the jackals in the sports media. Something like, "What is it about what I am saying you don't get? I am not going to tell you when we are going to raise rates until it is a better time to raise rates. I am not playing your game. You don't even matter. I have no time for you," and then stalk off the podium.
Yellen isn't out to please hedge fund managers who are short stocks and bonds. She's not about laissez faire, either. She saw how badly that played out in the last decade. She probably equates laissez faire -- which is the real name for a lot of the jibber-jabber I hear -- with the Irish Potato Famine of 1847 where the British blamed the Irish for being slothful and growing the wrong crops. She's out to try to help the economy, not hurt it.
She didn't go with the bearish script, which would have been to say, "In September we are going to raise rates no matter what." It didn't happen and that opened the door for this magnificent rally, which is, in part, related to managers who realize now they have to start buying stocks because Yellen's not necessarily going to lower the boom three months from now.
Next skepticism? The Greek bailout. We have seen a remarkable turn of events in the last five days' time. We have gone from believing that there will be an eleventh-hour save so don't worry about Greece, to thinking, you know what, these talks are going to break down and it will be total chaos as Greece is kicked out of the euro, to, hey, when Greece is kicked out it won't be so bad because we can see a path of default and drachma introduction that will be harsh but not cataclysmic, to, amazingly, that if Greece defaults, it will be Germany's fault. Hence why German Chancellor Angela Merkel sounded conciliatory today, even as the Greek leadership obviously scorns her.
Yes, this narrative has changed radically since a week ago. The onus has switched from the Greeks needing to make a deal, to the Germans needing to make a deal or the Germans will be derided for losing Greece to the East -- maybe Russia or China -- while also hurting all of the other countries in Europe. There's a budding resentment that Germany's been the biggest beneficiary of the euro, something that's openly true, to a belief that it has to transfer some of that wealth to Greece in return for basically nothing, which while unpalatable to the German leadership, beats looking selfish and unforgiving.
Either way, as the potential failure of the talks at last gets built in, the unknown factor gets tossed out and that's a good thing for the market.
I am non-stop talking about the super-freakin' strong dollar because we are on the cusp of earnings season and investors know that analysts are going to have to cut numbers and cut them big unless the dollar goes down in value. Remember what I always tell you, stocks go higher when estimates go up and stocks go lower when estimates go lower.
We get constant reminders of this. Oracle's (ORCL) down today in part because we are all tired of hearing, "Here's how we would have done if the dollar weren't so strong." Now we just say, "This is how you are doing, period, kiddo."
Or to put it another way, you missed estimates, Oracle, and we don't care if it is because of the strong dollar, we are sellers of your stock.
Same thing happened the day before with Federal Express (FDX). No one's asterisking the strong dollar any more as an acceptable excuse. That's why when the dollar went down because the Fed put off a rate increase, the stocks of companies that have the most overseas exposure started doing the best.
I like to use two stocks to best monitor the dollar's impact: Boeing (BA) and 3M (MMM). They are actually the only two you need because they are both incredibly well-run companies that do much better when the dollar is weak than when it is strong.
Boeing benefits because the weak euro is a huge subsidy for its mortal enemy competitor, Airbus. 3M is a uniquely international company that happens to be based in Minnesota --- remember one of those "M"s stood for Minnesota -- and only a third of its revenues are derived from business in the U.S. So when the dollar goes down these stocks fly.
If you are a Boeing shareholder I am sure it was quite jarring this week to watch your stock do nothing despite Boeing arguably clobbering Airbus in the order game at the Paris Airshow. But with the rate increase out of the way and the dollar going down, the orders suddenly matter and the stock's shining. Both 3M's and Boeing's earnings estimate forecasts for 2016 could rise, perhaps dramatically, if we, at last, bury the superfreakin' strong greenback; whoever ends up on the ten spot, goes lower.
Now how else do you measure negativity? We have the traditional way, which is the actual tally of bulls and bears taken by the Investors Intelligence poll that comes out every Wednesday. I was shocked yesterday to see that the index had the fewest number of bulls since October, which, you should remember, is the last launching pad to a tremendous rally. That bottom came at a time when we realized that Ebola could be contained. Hitherto it scared so many money managers that they became overly negative at the exact bottom. Or, one could argue, they caused the bottom with their negativity.
The second measure will surprise you, and that's the Fitbit (FIT) IPO. I was walking around the New York Stock Exchange today and a lot of the guys I talk to thought that this stock opened up way too high. Others told me they were anxious to short it.
I was shocked it didn't open up much more. Why? Because it happens to be a terrific company with tremendous sales, and, more important, earning growth. As CEO James Park said to me and my pal Scott Wapner, Fitbit isn't one of those companies that says, "We aren't going for profitability because the opportunity for big sales is too great." This company's always been focused on profitability. Which is why I think, if anything, it was undervalued even after today's pop.
This company has outrageous, albeit obviously unsustainable, 441% earnings growth. But let's say earnings for the year slows abruptly to 50%, which is pretty ridiculous given how well it is doing, and then say it slows further to just 30% for 2016, way below what anyone's looking for. Do you know that this stock sells at only 23 times those ridiculously low-ball earnings estimates? That's a substantial discount to the very comparable GoPro's (GPRO) stock. That's preposterously cheap. But it's that way because people think it's a fad and that Apple (AAPL) will crush them with its watch.
Nope. Not going to happen.
So, a commonsensical Fed, a weaker dollar, a disaster scenario and investor negativity have all combined to produce a combustible rally. We know the drill. Any one of these props can go away. However, the Fed heads aren't immediately going to contradict the chairwoman when they shoot off their mouths and there's a way out of the nightmare Greek narrative just when people have gotten way too negative. That's why the rally seems for real and the dip was, indeed, investable, once again.