When the Dow Jones Industrial Average flies higher by 350 points in the first half hour of a trading day, it tells you something. Actually many somethings. Some are good. Some aren't. Here's a few ways of interpreting the latest happy trading day.
The basic premise for the euphoria was that European leaders were meeting to discuss yet another possible way of salvaging Greece and Italy from themselves. They didn't have a resolution. They were just meeting. That was enough to get investors excited. As an investor, you have to ask yourself: why? Even if there is a successful bond offering that raises enough money to help these two governments continue for a while, it doesn't do anything except delay the inevitable. It's like lending money to a gambler who promises to pay you back, then goes and gambles some more, hoping he wins. He never does.
The point is that Greece and Italy have allowed their spending to get well beyond their tax receipts and are now looking for others to help bail them out. Both have new government heads but plenty of the old guard left in their respective cabinets and political positions. Unless they are willing to cut spending measurably, there won't be a positive result from lending them any money. So don't expect the current happy days to continue. However, there will be more, in spurts, as meetings are held, rhetoric is spoken, and actions are limited, if any are taken.
An upward move of that magnitude also suggests that investors have oversold stocks, taking them to levels that aren't justified based on their earnings. When there's any good news or hint of some, investors fly back into the market to grab the bargains. Another possibility: a major daily move based on hope says that investors will grab onto anyting positive in an otherwise negative environment, doesn't matter how substantial the reality is.
Investors are hoping, and as experience has taught in the stock market, there is no hope. Only facts. The fact is that investors are focused more on the macro effects rather than the micro ones of individual companies. How else to explain wild enthusiasm over possibilities in foreign countries and the lack of appreciation for the results of many U.S. companies?
That's a real positive for investors who think beyond the current negative market sentiment. Most investors are looking at the wrong things, except ones like Warren Buffett who can see more clearly than most. He's buying IBM. He can value a company that grows earnings every quarter, yet still sells for a reasonable price. Of course, there are many others buying. If not, all stocks would be down considerably. But if there were a real, value driven, upward move in the stock market, Monday's jump would only be the beginning.
Many U.S. companies are doing well, beside IBM. Microsoft, Intel, GM, Ford, Caterpillar and Apple are just a few. They're making good money in spite of a bad economy. Yet they're not selling anywhere near their old highs. In fact, in the last 5 years, the stock market hasn't gone up. It's been down. Five years ago, the Dow Jones Industrial Average was at 12,480. Today it's at 11, 550. Not a very encouraging statistic.
Of course, the last 5 years have seen a terrible economic recession. Most companies lost money. Their stocks are down considerably. Some didn't make it. Those stocks are gone. But don't look only in the rear view mirror. There are companies that not only survivied. They thrived. The above names are some of them.
The real irony is that most investors missed the rally on Monday. They're on the sidelines, having taken their hits (or a few, profits) and moved out of the market, waiting for the right time to get back in. Hopefully, they didn't choose Monday to start. Being out of the market is a sure way to miss a large part of a stock's return. Many stocks get so oversold that they move up 10% or more in a day when a real rally starts. Then they go higher. One rule to always follow: have some money in the market in the best stocks at all times. Not all your investment dollars, but some so that you can participate in the surprise days when investors start jumping back in.
Things aren't aligned yet for a real market rally. But good companies are selling at low prices. Start with the ones listed above. They've weathered the worst economic storm and are ready to do even better. Of course, if global economies don't keep traction or start to slide, then re-evalauation would be required. If you're out of the market, start picking up a few shares of the best stocks. No one can time the market. And the next upward move may be strong. You won't want to miss it. Just don't believe it's the real thing until it's based on real results, from companies or countries.
- Ted Allrich
November 29, 2011