Now here is where a lot of judgment gets clouded. There are plenty of people who believe that the Federal Reserve is life support for the stock market and when you take away the life support the stock market dies. These people do not know the history of the market, as encompassed by "don't fight the Fed" and "don't fight the tape" or, alternatively, they are so blinded by politics, which since the polarizing world of President Obama and Congress, now infects even the process of making money in the market.
I think it is a false link. Those who believe in the politically incorrect nature of what happened in this run -- that it is spurred only by the Fed -- missed out on a tons of money. I often think they don't care. That's because they are not investors. They are politicians masked as investors. Their views have to be avoided at all costs because they are not central to the process.
Second, those who think that the stock market can never transition into an earnings-derived advance don't understand sector rotation. When they say "this market," they are simply being brainwashed by trading in the futures as a market as a whole. That, too, is not investing. That's asset-class choosing and it's been dead wrong, too. The dominant asset class success story in my lifetime has been in the fixed-income world, not stocks, with the 30-year Treasury offering by far the best risk-reward during my career, which began in 1979.
But if you are a stock picker, you know that the most enjoyable, even most predictable, element of the market comes when earnings aren't manufactured by cost cuts but are generated by higher sales overlaid on a lean organization.That's where we are now. That's what we saw Friday. We are getting many signs that the international companies that are based here are now experiencing the transition from earnings-oriented investing -- something that's been quite bountiful -- to sales-oriented investing. When that occurs, the market can really gallop. In the meantime, there are plenty of people still betting that the tapering will be held off. They are the Clorox (CLX) investors, still attracted to slight growth with some yield. There are so many hedge funds betting against a limited batch of securities such as Clorox that there is a bizarre funnel effect of shorts covering, longs unwilling to sell because of gains and a nice dividend and outright share repurchases that shrink the float. There were 153 million shares of Clorox a little more than five years ago, and now there are about 132 million. That missing 31 million explains more of the move than people realize. It makes for hard shorting and easy owning. Now it is true that we could lose Clorox in the transition to higher earnings, although that sure hasn't happened yet. But anyone who knows the history knows that we now should be shifting to the bank financials. The money should come out of the non-bank financials as well as from the rest of the market and flow right into the banks. They haven't been allowed to shrink the float because the government keeps them from doing so, but it could occur soon. These investors might be drawn to technology, especially now that the personal computer class of tech seems to be bottoming as we have seen from the moves in Microsoft (MSFT), Western Digital (WDC), Seagate (STX), Hewlett-Packard (HPQ) and, most recently, Intel (INTC). And they might be interested in retail recognizing that things could get better than they are right now if the economy improves because of the possibility of more jobs and therefore more disposable income.
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