What happens if things are really good out there? What happens if the consumer is doing better, the lender is doing better, the manufacturer is doing better, the country is doing better and the world is doing better?
I think what happens is what happened today, we decide to pay more for stocks than we were willing to pay before, and the sellers really don't have a lot of desire to sell because, what the heck, the surprises for real companies -- good old-fashioned companies they understand, not just autonomous driving blockchain bitcoin machine learning companies powered by artificial intelligence and highfalutin algorithms that even Stanford comp-sci grads are baffled by -- are much better than we thought.
In other words, you have to lose all cynicism to understand this market, and unless you think like Bob Dylan, that you are younger than that now, you might miss the move.
So let's go over what's happening, go under the hood, and really understand what it takes to have this kind of rally, which, just to be sure, isn't all that wild given, say, that a Dow up 300 day is on a 24,000 basis. Divide by 10 and you have a plus 30-point day on 2400 and you know that it's not completely fanciful.
Before I get to sector analysis, let's start by understanding that most strategists I talk to, most who are on the record, have turned very negative on 2018, pointing out as I mentioned the other day that valuations are getting stretched and paying up here isn't prudent.
Big money can't stay in this market until Dec. 31 and then sell everything that day to prepare for the Armageddon that some think awaits us. At the same time, they have to outperform the averages to justify their keep. So you have an impossible situation where they want to leave, but if they leave they fall behind the averages. So natural sellers aren't surfacing. This is that winners-anointed theory I propounded earlier this month where I said all dips would be bought and people would want to show that they own winners.
So, first reason for what feels like a melt-up? Institutions can't find sellers until stocks move dramatically higher from where they are. If you want to know how to monitor this, all you have to do is look at how little volume moves big stocks. That's because the buyers are having to pay up to find natural sellers. It's the mechanics of the business.
Second, look at the kinds of companies with stocks that are going higher. They are older companies that don't issue shares to their employees like they are bottles of water or grains of sand, but are chary with them and do everything they can not to give them out to employees or even senior management. So the supply of readily available stock isn't there. Plus, older, well-capitalized companies with decent prospects take the excess capital they have and buy back shares. As I scan the stocks of companies moving higher, I find that the ones with the best action are the ones that sit there and buy back stock every single day. Like Caterpillar (CAT) , like 3M (MMM) , like the rails and the airlines, which are voracious buyers of their stock but barely print any for their executives or for the rank-and-file. And don't forget the soaring stocks of the banks, which are going to be able to buy a lot more stock back with the new regulatory regime.
Third is Washington. We are so used to Washington hurting the stock market that we don't even know what to do with a Washington that helps it except buy stocks. You can say what you want about Trump, but this is a man who gets up and tweets about the stock market being high and how proud he is of that. Again, say what you want about President Obama, but he actually might have regarded a new high as a sign that the rich are getting too rich. I think he disdained the stock market as pretty much a playground for the wealthy and would have viewed this move with contempt. The president before that, George W. Bush, regarded buying a home as a badge of his success, which worked until they built too many homes.
Not Trump. He loves the stock market as a barometer of what he's up to. It's his Nielsens and his president approval rating polls all wrapped up into one and it can't be faked!
In the meantime, millions of people regard the stock market as a place to make money if they just buy index funds and hold them. They are inclined to use the excess money that the stock market has made for them and do things with it that are good for them and, yes, for producers of goods.
Fourth is the actual tax legislation. If it passes, it is very good for all kinds of businesses except for tech companies that don't have only a fraction of their business here. That, again, is a common characteristic of what's rallying. It's a government-mandated rotation.
Fifth, the rest of the world's on fire. Think about it. There's always been one area of the world keeping us back in the last 10 years. It was us. Or Europe. Or China. Or Europe again. What's bad now? Venezuela, which is actually good for oil because they will not be able to produce enough. That jibes well with OPEC trying to control the spigot, and don't forget this market likes higher oil prices.
Sixth, there's the raw numbers that come out of the government. Every inflation number is low. Every employment number is high. Every wage number is just OK. Every spending number is pretty good. If you were back in economics 101 class, you would have to throw away your textbooks because none of this is supposed to happen. But it is happening. Sure, we will have rate hikes, but at this pace it will be two years before they will crimp business.
OK, let's go deep now. Seventh is the force fields that are confounding the Death Star. Or in English, as powerful as Amazon (AMZN) is, it still can't destroy whole businesses yet. We know it wants to own the grocery business. So it buys Whole Foods (WFM) , which sends the stock of the largest independent grocer down to $21, a brutal comeuppance as it had already been going down from the $30s because of weaker sales. But today it announces sales that are pretty good and we realize that the Death Star hasn't killed Kroger (KR) . It's easier to kill Kenny!
At the same time, Costco (COST) reports a plus 8% sales number that's extraordinary. Amazon hasn't killed that either. By the end of the day, we realize that the most shorted group, the retailers, aren't complying. Why should they when PVH (PVH) , which dominates a huge percentage of apparel in this country, is crushing it, and as CEO Manny Chirico told us last night, this is the best holiday season in four years. Since no retailer is expecting that, and I mean none, there's not a lot of excess inventory, which means there will not be a lot of sales.
Or to put it another way, it's gonna be a real good holiday season.
Eighth, what the heck else are you going to buy? There are still plenty of stocks that yield better than bonds backed by companies with fabulous balance sheets that, unlike bonds, will raise the yield by giving you more.
Ninth, where are the disappointments? I can count on one hand the companies that have disappointed so far at this stage of the quarter. Why? Because it turns out that we aren't at peak housing, we aren't at peak auto, we aren't at peak aerospace, we aren't at peak travel and we aren't at peak anything. At least for now, and that's all you can care about in this market.
Finally, 10th, cynicism, it turns out, is not an investment strategy. We have all been so conditioned to think that everything's going wrong, that everything's rotten, that there is nothing good happening, that we forget to look around us at the companies we work for. Sure, there's General Electric (GE) . Then there's, wait, it will come to me. Ah, I don't have time for questions if I wrack my brain to think who else is out there. And even that oil company in drag could be saved by higher crude prices as it divests what amounts to a highly fossil-fuel-impacted enterprise. (General Electric is part of TheStreet's Action Alerts PLUS portfolio.)
In short, here's the deal. Good is, well, good. There will be things that go wrong, for sure, but right now they aren't that evident and this market is a "what have you done for me lately" market and the answer is plenty.