Why Cramer's Bullish
Mar 02, 1998
Dispatches from the Front: Cramer's In-Depth Explanation of His
Bullishness
By James J. Cramer
I want to depart from my usual format of tackling an obscure trading
issue and instead talk about some investing concepts more in depth.
Earlier this week after I finished co-hosting "Squawk" on CNBC I
penned this very abbreviated piece because I felt so strongly that
the bull was not being championed correctly. Now I want to go back
and annotate it for all of those who were confused by my bullet
points.
***************
Why shouldn't it go up? Let's go over the tenets of the bull. (Let's
be basic for a moment. When stock prices go up and up, we call that
a bull market. This piece explores what underlies this particular
bull market, the one that began in January 1991 and continues merrily
to this day.)
No inflation -- and I mean no inflation. (Inflation is the most
important determinant of future prices. If people think inflation is
going to roar back to life, they know that financial assets, such as
stocks, will not be worth as much in the future as they are now. That
causes people to want to sell. The Federal Reserve's chief tenet is
to stop inflation and preserve purchasing power. As long as inflation
remains low, or dormant, the Federal Reserve will tolerate a buoyant
stock market. The moment inflation rages, the Fed uses its blunt
instrument of higher short-term rates to crush inflation. People
will sell stocks to pick up a high, risk-free return from short rates.
In other words, if the Fed raises rates, say to 7%, I know I would
regard 7% as a great competitor to stocks. Therefore, some of my
money would get plowed into investments that aren't stocks. That's
how the market as a whole thinks.)
Lots of liquidity. Money is just pouring in, and there's no real
competition for the dough. (Liquidity is a very overused word and if
you are not in this business it seems like a silly, confusing term.
What it really means in this case is that there is a ton of money
around looking for a home. In the landscape, money can go into bonds,
stocks, real estate, gold, foreign currencies, stamps and more
esoteric things. Right now stocks seem to offer the greatest
appreciation potential, so that's where the sloshing money is going.
Why is there a lot of money around? Because there are many jobs being
created and lots of jobs means lots of paychecks, which means lots of
discretionary income for spending and investing.)
Earnings that turned out to be just fine, despite all the mostly
bogus hand-wringing. (Here's a very important point. Lots of talking
heads come on TV and say that corporate earnings will be impacted
negatively, say, by Asia. It turns out that, yes, some were, but many
weren't. In fact, most weren't. There were not that many
disappointments after all and the worrying about corporate earnings
was misplaced. For instance, Dell smoked in Asia during the fourth
quarter. That's just one example.)
Nobody loves, loves, loves the market, and people are reluctant to
call a bull a bull. Skepticism runs rampant. (Helene Meisler, the TSC
Chartist, did a terrific piece Friday about this issue. In the 1980s,
before the crash, people used to be like I was on Squawk: outright
bullish. Now it is very de rigueur to be so positive. As long as it
stays like that and there aren't a lot of cocky bulls, the rally will
continue. This is that wall of worry concept which is very valid,
IMHO.)
No rush of equity offerings to sop up the funds going into the
market. (Most people don't monitor supply and demand very well. I
watch it like a hawk. When a lot of stock is retired routinely through
buybacks, and not much stock is issued through underwritings, that is
an explosive situation, given the liquidity we have. Let's take Gap
stores, for instance. The company reported the other day. I was
shocked, I mean shocked, that GPS bought back millions upon millions
of shares in the last year. GPS probably retired more shares last year
than were created in retail-land. That's staggeringly positive. Most
big-cap companies have ongoing buybacks, as they don't need all of
the capital for their businesses, and it is a safer and cheaper way to
return capital to shareholders than boosting the dividend regularly.
That, by the way, is one of the constantly overlooked issues for
quant guys. They keep hoping the dividend yield of the market will
increase. Forget it, companies love buying back stock, and paying out
fewer dividends! And shareholders don't mind, because they understand
that dividends are double-taxed. In the meantime, the underwriting
calendar this year has been sluggish, at best. Very few big deals to
put money to work in. Imagine yourself at a large mutual fund. New
money comes in everyday. You feel as if you have to put money to work,
lest you fall too far behind the indices. Now what do you do with the
cash? Typically you look for new ideas, and underwritings. But there
aren't many. So you end up buying the same old stocks. And they all
go up!)
Massive takeovers that, even when they fall apart, spawn interest in
groups. (Nothing retires millions of shares like takeovers, and boy
have we had takeovers. These take stock out of the market and put cash
in. They also create fear among short-sellers, who could otherwise lay
on stocks and keep them lower. Even stock-for-stock takeovers are
bullish, as they create more wealth -- at least in this market. Don't
email me about the academics of this; it's empirical.)
A Fed Chairman who gets it. (Greenspan is the great bull protector.
By keeping inflation at bay, he creates a climate that is perfect for
investing. The man's credibility is his biggest asset. And he is the
market's biggest asset.)
A Treasury Secretary who gets it. (When I worked for Rubin at
Goldman, I knew he was the smartest man I ever met. He turned around
every department and made the place run smoothly, efficiently and
profitably. But not greedily. His handling of the budget deficit, his
decision to change the maturities of Treasury bonds, his staunch
dollar support are all wonders that we take for granted. Okay I will
say it: best Treasury Secretary since Hamilton. And I am NOT looking
for a job in Treasury! Never go to Washington. Don't even want to
visit.)
I was acutely conscious when I was on CNBC's Squawk Box this morning
that other than Mark Haines, everybody gives me a hard time when I
say how bullish I am. I always feel like the least rigorous guy in the
room when I expound positively. (This is a direct attack on the
Grantism of our time. The debate for equities has been set by the
bears. They have, since the Crash of '87, owned the media. Someone
emailed me this week to say how courageous I was to talk openly about
my views on Squawk. I had to think twice before I realized that it
must seem that way, given how caveated everybody else is.
Fortunately, I have numbers that back me up, that allow me to speak my
mind and say how I feel without inhibition.)
But Haines gives me a chance to tell the truth without all of those
caveats that everybody else invokes. He doesn't try to trip me up by
saying "but weren't you worried about Asia." Of course I was, but now
I am less worried. He listens and understands that it is not a sin to
be bullish. (My two points here -- I don't believe being bullish is a
religion. I think there are times to be bullish and times to be
bearish. I was bearish on Japan for a decade! I have been bearish on
U.S. equities many times in the last 20 years. When I am bullish, I
go long. I do not think, oh no, I can't turn bullish because six
months ago, or even six weeks ago, I didn't like the tape. I have to
do what my gut and my brain tells me to do. Haines understands that.)
As long as I have traded stocks, 20 years, when I have been bullish
I have found myself under attack from so-called experts who claim to
have all of the rigor on their side. I am sure that there will be many
more such attacks. The price-to-book, the P/E ratio, the
price-to-sales ratios have been crummy for years. Traditional
valuation got you out 5,000 points ago. Remember, I would rather make
money than be "right" by those measures. I would rather look for
relative value than shun it for absolute vertigo. [porc feels the
same way -- RR.]
I would rather run the risk of seeming overanimated than keep people
out of a market I think can make them money. (This is the absolute
essence of my philosophy. I hate to lose money. I like to make money.
I don't want bias or emotion -- or even a misplaced reading of
history -- to get in the way of that process. And when I like the
market I like to tell others.
Someone emailed me this week accusing me of getting bullish
on Squawk to help my portfolio. Can I tell you something? I don't
need to go on Squawk to make a ton of money. I debate daily with my
partner Jeff Berkowitz about how much time I spend on television and
writing for TheStreet.com. I just Friday canned a March Squawk
because Berko is going on vacation and no way I am going to have both
of us out at the same time. I do this stuff because, as anyone who has
met me in the last 20 years knows, I live and breathe and love it. I
love to help others make money. It is pure enjoyment for me. I am no
Robin Hood. I steal from no one. I want to help. I don't want to
pick stocks for you. I want you to learn how to control your money.
How you can be a better client. How you can be empowered about your
pocketbook so others don't rip you off. I don't want to be your
bullish guru. I want to help educate you about the world I trade in
and invest in everyday. I don't want your commissions. I don't want
your money or a percentage of your money. I just want your money to
grow. You have a problem with that? Go pay 200 bucks an hour to a
psychiatrist. He can help you better than I can.)
James J. Cramer is manager of a hedge fund and co-chairman of
TheStreet.com. Under no circumstances does the information in this
column represent a recommendation to buy or sell stocks. Mr. Cramer's
writings provide insights into the dynamics of money management and
are not a solicitation for transactions. While he cannot provide
investment advice or recommendations, he welcomes your feedback,
emailed to Jjc@thestreet.com.
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