Respect the Flow of Market Fuel
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By James J. Cramer
07/15/2003 08:43 AM EDT
Markets need fuel to go higher. Fuel can come in the form of wages saved, pension plans boosted, cash forced in by low rates, takeovers, money reinvested and redirected assets.
There's a tremendous amount of emphasis on the first source of fuel: wages saved. Market types habitually link the lack of job creation to the potential for a dangerous market, as if one of the things you do when you get hired is put money away for savings. While that can be true, the notion of its importance is vastly overblown. In fact, to analogize, people think that wages are like gasoline, literally indispensable to the combustible engine that is the market. But this engine views all fuels pretty much equally, and the coal, natural gas, wind and nuclear energy that are these other sources listed above work well, too.
Take pension plans. We saw a bunch of states raise capital to invest in stocks during the month of June. Now that money's coming in. If we could have a map of what's being forced into the market, if we could tally the various streams that are pouring in, I think we would be surprised to find that these state pension plans are pumping and pumping hard into the engine right now.
Cash forced in by lower rates probably remains the single biggest contributor to the upside here. As more and more people come to realize that rates, or at least short rates, aren't about to shoot up soon, they are becoming more committed to taking that money and putting it into the market. The dividend boosts we have seen the last few weeks have influenced that flow heavily. Not only is it not about to run out, it is growing stronger by the day as the conviction sets in that the Federal Reserve has no plans to raise rates but companies like Bank of America, Citigroup, Procter & Gamble and Goldman Sachs have a hankering to raise dividends.
Money reinvested, I predict, will be new and growing category. If you decide to own a stock because of a dividend, you will buy more of that stock with the dividend money. I have noticed this in my portfolio service, where people are somewhat fascinated by the dividend streams and eager to reinvest them into the stocks that produced them. It's almost like a "rewards" point system. This reinvestment could be still one more unheralded benefit of the president's plan to change the way capital is invested.
Finally, there are the redirected assets. These are assets that have been in one segment and are being redeployed into others. Normally there are enough new issues in the market that these redirected assets don't play much of a role in moving a market higher. That hasn't been the case this year, as IPOs remain scarce. That means that when we get takeovers, which have heated up, the money gets thrown back into moving up the remaining stocks. We also are seeing a tremendous redirection away from one sector -- energy -- into others. These energy stocks, which have become an amazing source of funds (and seem to indicate that not long from now, the power of OPEC will be broken), keep throwing off cash for other areas as they go down because the cash taken from them will not rest in cash reserves. It is money dedicated to equities.
All of these fuels give the market this feeling of a beach ball that can't be kept under the water, the way one bobs back up after kids jump on it in the pool.
Why bother to point this out? Because it is integral to understanding how the markets could go up, even if I am wrong about the earnings prospects. Of course, ultimately, without the earnings, we will churn or go lower because fuel can be burned with the market not going higher. (We all know there are many periods where wages are rising and jobs are plentiful yet stocks go down.)
But with the earnings coming through, you can understand my Dow 10,000 prediction. More important, you can understand from this thesis why the writings of someone I respect, say, Bill Fleckenstein, may not yield the results expected -- a rising market -- because there's simply too much money chasing too few goods, however tainted the goods are.
One of the hallmarks of my "style" of investing has always been to understand where the money comes from. If you understand the sources, you understand how hard the river flows and you understand how the flow could lift a lot more boats than you thoughts possible.
That's what's happening now. To not respect the flow is to confuse and ignore some of the more physical reasons why stocks can go higher even as, perhaps, they shouldn't.
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James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to jjcletters@realmoney.com. Listen to Cramer's RealMoney Radio show on your computer; just click here. |
