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A Bull Is Born

Sure, everyone hates the market. But with interest rates low and investment alternatives scarce, September 22 may have marked a new beginning.

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Professionals hate this stock market. They think it's overvalued on earnings and going up solely because of the lack of other alternatives. They think it's a roller coaster poised atop a downhill drop, an accident waiting to happen. And they hate that there are no alternatives: Cash brings you next to no return and bonds seem downright dangerous given their skimpy return and monster run.

Individuals hate this stock market, too. They've had it with losses, they're fed up with bad advice from crummy mutual-fund managers, and they're tired of the blue-chip tech stocks they paid hundreds of dollars for that are now worth a fraction of that. Either they've sold everything and turned their back on the market or just decided it isn't worth throwing in good money after bad and started hoping to one day get back within a few dollars of where they got in.

Which is precisely why I think the market is poised to go higher -- perhaps dramatically so. Look how easily it's shrugging off bad news. Last week, after an American Airlines flight crashed in Queens, it barely blinked; traders paused to sell off the usual suspects -- travel and leisure -- and then kept buying. This market might well be a baby bull, conceived in the despair of September 11 and born on September 21, 2001, after the worst sell-off since the Great Depression.

The main reason is simple: Interest rates are lower than they've been in 40 years. And those lower interest rates that allow buyers to finance new cars for nothing, combined with consumers who just won't quit, are bringing back the economy. Meanwhile, inflation is the lowest I've ever seen it, and, most important, neither the government nor big business has emerged as an enemy in the wake of the World Trade Center tragedy. Americans now see the government as a necessary protector from an evil that the private sector can't deal with. And the government, by deciding to stop pursuing Microsoft, is showing people that the real villains aren't companies that hire a lot of people, but terrorists who kill a lot of people. For financial assets, this adds up to nirvana.

If the economy bounces back the way I think it's going to, there are many stocks that will seem incredibly cheap. And if the market really begins to roar, Microsoft could trade up to 100, Cisco to 30, and IBM up to 140. That's still less than we once paid for them, even though their prospects could be much brighter this time around because this recession has flushed out some of the competition.

Sure, some people have been worrying that we're falling into the Japan trap by setting interest rates so low. To which I say, absolutely not. Japan's market traded at its current level way back in 1984, when we professionals all considered it wildly overvalued. Even now, does anyone really trust the earnings statements of the companies over there? The banks? The central bank? Now ask yourself the same questions about our market and you'll get a resounding "yes" to all of them. In other words, that comparison is totally bogus. Unlike Japan, America is responding to lower rates; we've already seen auto sales and home sales go through the roof in response to them. This past week's retail-sales increase was the strongest in almost a decade!

Markets that no one likes almost always rise. When everyone hates the market, no one stays in. And then, when the market starts to heat up, everyone wishes he was in. Sooner or later, either the professionals or the individuals -- or both -- capitulate. That takes everything that much higher.

What happened in this country's markets on September 21 was pure panic, the likes of which we hadn't seen for three years. We had institutions give up on their tech stocks. We had large margin-call selling from hedge funds and smart investment partnerships like the Bass brothers, who blew out their shares of Disney at what I think will be a multiyear bottom. We had individuals stop paying attention to stocks entirely; the same people who checked up on their portfolios ten times a day eighteen months ago now can't bear to look.

And that's how bottoms get formed: in terror. Sellers get rid of all their stocks and turn toward other alternatives that just don't do as well over the long term. It was how we got bottoms in 1987, in 1990, and again in 1998. Each time, the market looked like this one -- it had declined more than 20 percent from its high, causing a wide variety of investors to turn tail and head for the exits.

Of course, it turned out that the panic selling we saw after the tragedy was exactly the wrong thing to do, confirming once again that nobody ever made a dime panicking. Worse, it took place right at the very moment when the Federal Reserve took interest rates down to levels this country hasn't seen in 40 years, making cash an untenable investment and bonds completely unattractive. Then the Feds, in a surprise move, stopped issuing 30-year bonds altogether. That left Americans with two choices of what to do with their money, both of which pleased the Federal Reserve: Spend it or invest it in stocks.

Given those two alternatives, you can bet that the stock market is going to receive more than its fair share of dollars. Consider also the case of the 2.2s. Cash earns 2.2 percent and there are 2.2 trillion dollars in investment dollars sitting on the sidelines. How long can that last?

So why aren't more people embracing this baby bull? Wrong question. Most people never embrace a bull market at its beginning; they run from it. And that's exactly what's happening now.

TheStreet.com
Check out TheStreet.com's "10 Questions" feature this week. Brian Hayward, manager of Invesco Telecommunications Fund, is on the hot seat. Available free of charge at www.thestreet.com.

James J. Cramer is co-founder of TheStreet. com. At the time of publication, he owned stock in Microsoft, Cisco, and IBM. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions that he takes may change at any time.

E-mail: jjcletters@thestreet.com


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