Take What the Fed Gives You

Hey, did you hear that the Dow Jones Industrial Average just hit a new all-time high?

Of course you did, and that’s because this week, the financial media was replete with all kinds of hype about how the equity markets are back, and how investors are jumping for joy over all of the money they’re making.

Now, if this were true, I’d be very pleased. Unfortunately, the reality is far removed from the hype.

I’m not exactly a grizzled old market pro, but I have spent more than two decades in the investing game, first as a reporter, then as a hedge fund trader, a stockbroker and now as a commentator and advisor. From my unique perspective, I can’t think of a time when a market rally has been so unloved.

My friend Tom Essaye, a veteran NYSE floor trader and creator of the highly recommended publication, The 7:00’s Report, told me an interesting anecdote about his early years at the NYSE trading floor that I found extremely enlightening, especially within the context of this week’s all-time highs.

Tom told me that his booth on the NYSE (the Merrill Lynch trading desk) was made of wood and he recalled that on one corner of the booth someone had scribbled in permanent marker, “Dow 10k, March 1999 — And We Were There.” The inscription was signed by all of the clerks who were working in the Merrill booth that day.

“I remember thinking how neat that was, and what it must have been like to be on the floor back then, and the feeling of almost limitless possibilities in the market, when new highs in the stock market represented a surging economy in the United States and seemingly brighter days ahead,” Tom explained.

Herein lays the key to the skepticism, discomfort and distrust that’s made this rally so unloved.

You see, despite the new all-time high for the Dow, there’s a sense that all of this upside is merely a Fed-funded chimera that does not represent a surging economy and/or optimism in the market. Rather, most Wall Street pros and even most individual investors, now realize that at the core of this rally is central bank manipulation of the money supply via quantitative easing. The better term, and the more accurate term, is simply “money printing” — which is being done to the tune of $85 billion per month.

Interestingly, I think that while skepticism and disbelief among professionals about this rally is warranted, the very fact that there is so much disdain present is one of the biggest reasons why the market keeps chugging higher.

I suspect that while the pros don’t trust this rally due to the fact that it is driven too much by Fed stimulus and not enough by fundamentals, money continues to move reluctantly into stocks simply because it remains the best way to achieve alpha for clients. In the money management game, there is nothing more painful than missing a rally due to skepticism and/or fear. For this reason, traders, fund managers and especially the so-called “fast money” on Wall Street continue to bid stocks higher.

As an individual investor, your goal also is to seek alpha for yourself. And while I certainly understand the risks here, if you are not long stocks right now, you just might want to, as Tom Essaye puts it, “simply hold your nose and buy.”

The bottom line here is that while this rally can be justifiably considered a figment created by Fed Chairman Ben Bernanke and his merry band of central bankers, there is nothing wrong with taking what the Fed gives you and participating in the current upside in stocks. Just be sure you have tight stop losses in place, along with a diversified portfolio, to shield you when the curtain finally gets lifted, and when the fiscal equivalent of the Wizards of Oz at the Federal Reserve no longer can keep the ongoing rally ruse from becoming undone.

Follow Jim on Twitter: @Woodsish.