At last, the real "top-calling" articles I've been waiting for have arrived. Last week we got a plethora of articles about how the Twitter (TWTR) debut signaled the end of the run. Today comes the quintessential piece, the lead story in The Wall Street Journal: "Stocks Regain Broad Appeal. Individual Investors Are Returning to Stocks, Which Could be Bad." Put aside, for a moment, the hilarity of the "could be bad" subhead. Bad for who? Bad for what? Bad for individuals? The bulls? The bears? The country?
Let's just focus on what I call the whole "time-honored-ness" of the exercise.
First, it is true that the market's had a terrific 24% advance. It's also true that the stock market has been, in aggregate, a pretty darned good place to put your money since the bottom in March of 2009.
Second, I am willing to stipulate that, judging from fund flows, individual investors are definitely more interested in stocks. As the article points out, $76 billion has been put into stocks vs. $451 billion pulled out during the 2006-to-2012 time frame.
Third, I am not oblivious to the streaming-hot nature of the initial-public-offering market. Exhibit A, Twitter, is incredibly expensive, both in its pricing at $26 and in its opening at $45. As I said all last week, everyone had a right to overpay for anything, as long as they are willing to accept the consequences, which may include the possibility that something will go wrong with the company or with the thesis.
Oh, and what happens if Twitter is like Facebook (FB)? Here was a highly overvalued company at $38, where it opened, and then it switched to a very inexpensive $17, relative to what turned out to be tremendous earnings power as the company executed properly. Every growth fund would have killed to be able to buy Facebook at $38 now.
Fourth, I will acknowledge that the sentiment polls reflect way too much optimism, with far too many bulls. On an empirical basis, there have been only four other times when the market has come into November up 20%, and in all four cases it finished higher. Still, it's hard to believe that there should be a huge number of bears, isn't it?
Sure, I would like fewer bulls and a few weeks' worth of stories about how President Obama and the Tea Party-driven Congress hate each other more than ever, as that should certainly do the trick. The drumbeat of Washington horror has been put on hold until December, when talks of some sort will begin anew. We have seen it over and over again since this president was elected. You get a calm, like we are in now, during which the averages advance and even get giddy. Then comes a storm, when Washington can't agree to anything except to hate, and the bears gather steam and the market pulls back again until there is some bogus, can-kicking resolution.
But, sorry, I simply refuse to buy into the notion that it's "bad" now that the public has stopped pulling money out of the market, and has now put back in about one-sixth of what it has pulled out.
First, it's way too glib to rely on these figures. When you literally take away any inflation-adjusted return for any other investment, you would think that some money has to come toward stocks, wouldn't you? Don't you find it more than happenstance that this period coincides with the roll-over of hundreds of billions of dollars in CDs done at much higher levels vs. those of five years ago? It's a "no alternative but" scenario, if you ask me.
Second, these kinds of stories pack a great deal more punch when they are backed up by evidence that merchandise -- other than a red-hot initial public offering -- is historically expensive. But I wouldn't regard 14.7x forward earnings as expensive. Think about the report period we just went through. The vast majority of companies that I follow issued numbers that caused you to raise forecasts.
Plus, many U.S. companies are internationally exposed now. So if you adjusted for the wild currency swings -- which have made the dollar much stronger than we had thought at this time last year -- you would see that stocks are actually a lot cheaper than what that multiple would suggest. True, last year the multiple was lower, at 12.6%. But, when you consider the damage that the debate over the fiscal cliff caused, in addition to the Washington sandwich of sequester, you had to anticipate a shrinking multiple at that time.
How about the IPO market? Yes, plenty of companies are coming now, and there are real sectors of overvaluation, especially in the biotech cohort. However, every time we chastise people for getting too enthusiastic, we have to remember that Celgene (CELG), Gilead (GILD), Regeneron (REGN) and Biogen Idec (BIIB) are among the best performers in the entire stock market -- up 89%, 83%, 65% and 61% respectively. So, to me, it would make sense to try finding something that looks like these winners, especially on a day when still one more expensive junior biotech, Viopharma (VPHM), gets a bid, on top of the gigantic Santarus (SNTS) bid we caught Friday. You want to tell people not to play that group and instead to focus on the endless parade of master limited partnerships?
Oh, and as for the bubble in bonds, what do you expect? The Federal Reserve created a world where companies can refinance so that they can grow and hire -- and I think most of us would agree that, if you changed the tax code, they would actually start hiring in the U.S. with alacrity. But that would involve compromise, so forget about it.
Too many follow-on offerings? What's that complain about? You want bankruptcies of highly indebted private-equity deals? I would prefer the solvent trail that these follow-ons insure.
Let's deal with the heart of the matter, though. That is, it may still be early in the migration from stupid, hardly safe low-yielding instruments to risk-adjusted assets that give you a pretty strong return, provided you collect the dividends. How many professionals have you heard come on air, or be in cyber-or actual print, saying, "Come on in, this one's the real deal"? How many professionals have professed love for stocks and begged people to invest in them? Sure, permabull Warren Buffett has, although he's backed off of late. But he loved stocks in October of 2008, so let's stipulate that he's not a timer -- something that he would be more than insistent about.
No, during this period, most managers to whom I have listened have had one foot out the taper door. They have lived in fear of what the Fed will do regarding the quantitative-easing program. They have bemoaned that the earnings aren't real because of the lack of revenue growth. They have been so frightened of Washington that they have been tepid about stocks, to say the least. They have tremendous faith in our president to do the wrong thing for the stock markets, and they have forever fretted about a European or a Chinese collapse. They have been agnostic bulls at best, and if they now switch and gain conviction, that would have me worried.
Ultimately I think that there will be squalls, of course. We had one just last week about the economy being too strong, only to have it be resolved in a positive fashion in Friday's session. Just think that last week we had another end-of-the-world scare that that took our breath -- and our money -- away.
But the idea that, once again, because "retail" is stirring -- when alas, these folks have been leaving in droves for years and years -- things are "bad" for stocks? Well, by that measure this factor just joins the litany of everything else that we have heard has been bad for stocks as the market has seemed to endlessly climb a wall of worry.
So let's put it like this: As a bull, I could read these stories and have said, "That's it. I have been a bull since March of 2009 and I want out. This is it. I am done." I do see plenty of areas I want to avoid, because they seem expensive. But to pull out now because individual investors are "back," even as they are barely in town? Let's just say, find me something else good to do with my money and I am there. If not, feed me some more negatives. I need them to convince me to put my money in a CD yielding 0.82%, the current rate in a five-year piece of paper -- something that, in the end, seems pretty frothy to me.