Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Will You Make Money in the New Silver Bull Market ? - 13th Aug 20
Hyper-Deflation Capital Destruction And Gold & Silver - 13th Aug 20
Stock Market Correction Approaching - 13th Aug 20
Silver Took the Stairs to $21 in 2008, Took Escalator to $29 2010. Is Silver on Elevator to 120th floor today? - 13th Aug 20
President Trump Signs Additional COVID Relief – What To Expect from the Markets - 13th Aug 20
Has Gold's Upward Drive Come to an End? - 13th Aug 20
YouTuber Ads Revenue & How to Start a Career on YouTube - 13th Aug 20
Silver Notches Best Month Since 1979 - 12th Aug 20
Silver Shorts Get Squeezed Hard… What’s Next? - 12th Aug 20
A Tale of Two Precious Metal Bulls - 12th Aug 20
Stock Market Melt-Up Continues While Precious Metals Warn of Risks - 12th Aug 20
How Does the Gold Fit the Corona World? - 12th Aug 20
3 (free) ways to ride next big wave in EURUSD, USDJPY, gold, silver and more - 12th Aug 20
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

In This Stock Market, Don't Drink the Kool-Aid

Stock-Markets / Stock Markets 2015 Feb 15, 2015 - 05:26 PM GMT

By: Money_Morning


Michael E. Lewitt writes: Stocks hit new records last week as central banks around the world continued writing checks to prop up still struggling economies, the price of oil stabilized, Vladimir Putin lured the West into a phony truce in the Ukraine, and Athens and the EU tried to pretend that Greece isn't hopelessly insolvent or that it even matters if it is or isn't.

In other words, investors were once again all too willing to ignore economic reality and drink the Kool Aid being served by central bankers and politicians.

We might as well call this the "Jonestown Market" because the cult leader Jim Jones could just as easily be handing out paper cups filled with colored water and investors would be swilling it down…

A Planet of Debt

Investors no longer require good news to cause them to bid up the prices of grossly overpriced equities. All they need is the promise that central banks will keep printing funny money to send them running to call their brokers.

And why not? This formula has worked great for the past six years. Why shouldn't it work again?

I will tell you why. Six years ago the world has much less debt than it does today. It was also much more stable geopolitically than it is today. It also had yet to create a bubble in the energy sector, the social media sector or the biotech sector.

Stocks were trading at rock bottom valuations and credit instruments were trading as though the world were about to go out of business.

Today, the world is home to more than $100 trillion of debt that can never be repaid and $700 trillion of derivatives whose risks very few people understand. There is massive overcapacity in global commodities. Stocks and bonds are grossly overvalued and priced for perfection.

So that is why central banks incessantly printing paper money to cover over the inability of governments to create sustainable economic growth is not going to work this time.

And why investors who keep buying stocks indiscriminately rather than hedging their heroic gains of the past six years and focusing on select, undervalued stocks are going to get their heads handed to them sooner or later.
Money Destruction Is Accelerating Now

Even worse, the U.S. dollars they are using to buy these stocks are being actively destroyed by the Federal Reserve's policies. The dollar may be appreciating against other paper currencies like the euro and the yen, but in the end it is just another paper currency and is being actively debauched by America's own central bank.

But the whole world has gotten into the money destruction game. In recent weeks, 12 more central banks have eased policy including the European Central Bank, Switzerland, Denmark, Canada, Australia, Russia, India, and Singapore.

And don't forget the kamikaze mission that Japan's central bank launched last Halloween. In many of these regions, interest rates are now negative, which means that capital sitting in banks is eroding by the day.

Policy failures are rampant yet they are celebrated by stock investors who have the attention spans of fruit flies. Whatever gains they enjoy today are going to be decimated tomorrow when the consequences of these policies come home to roost.

When the Fed Will Hike Rates

The U.S. economy is not accelerating, contrary to what the Happy Faces being paraded on financial news networks are telling people; it is actually slowing. But investors don't have time for facts. They are too busy sprinting headlong into disaster.

Last week, the Dow Jones Industrial Average (INDEXDJX) added 195 points or 1.1% to close at 18,019.35 while the S&P 500 (INDEXSP) closed at an all-time record high of 2096.99 after popping by 2% o4 42 points. The Nasdaq Composite (INDXNASDAQ) is once again trying to regain its Internet Bubble level, adding 149 points last week or 3.2% to end the week at 4893.84.

Bonds sold off as the yield on the benchmark 10-year Treasury ended the week back over 2%, rising 8 basis points to 2.02%. The yield is still 15 basis points lower than it began the year. Investors continue to debate the timing of the Fed's first rate hike.

My money is still on June as there is little reason for the Fed to keep rates at zero in the current environment. As disappointing as the recovery has been, zero interest rates are not the answer.

Stocks were powered by a big move in Apple, Inc. (Nasdaq: AAPL), which gained 6.9% to close at a record $125.65 per share, giving the company a market capitalization of $740 billion. Of course, that isn't enough for Apple shareholder Carl Icahn, who called for the stock to trade at $216 per share in a self-serving letter that he released to the public. That would give the company a market cap of $1.3 trillion or almost twice its current value, which already ranks as the highest valuation ever achieved for a public company.

In contrast, Tesla Motors, Inc. (Nasdaq: TSLA) tanked after reporting disappointing fourth quarter earnings. Tesla remains an absurdly overvalued stock trading at 40% of the market cap of General Motors Company (NYSE: GM) while manufacturing a fraction of the number of vehicles as the auto giant. GM is coming under attack from activist investors and is considering undervalued by many.

Whatever You Do, Don't "Rock the Bubble"

Tesla CEO Elan Musk, scrambling to meet the carnival-barking promises he keeps making to investors, made the absurd argument to the press this week that his company should be worth in ten years what Apple is worth today – $700 billion. The SEC used to throw corporate executives in jail for making those types of statements; in a stock market bubble, they just ignore them.

And we are in a bubble even if it isn't as big a bubble as the last one. The forward multiple on the S&P 500 has jumped from 16x earnings at the beginning of the year to 17.5x earnings today. How did it do that? All it took was analysts, who are always behind the curve, to lower their 2015 earnings estimates for the S&P 500 to account for lower oil prices and a higher dollar and for investors to keep bidding up stock prices and the multiple melted up. The historical average forward multiple is 14x.

But before we start comparing multiples today and in the past, we need to remember that today's earnings are inflated by stock buybacks, low interest rates and phony stock option accounting (primarily by tech companies). As a result, comparing current and historical multiples isn't really comparing apples-to-apples.

This subtlety is lost on most investors, which is one reason why the market keeps rising. But earnings estimates are continuing to drop for 2015 for a variety of reasons.

With the Fed likely to raise rates before the end of the summer, the stock market is definitely not priced for what is coming. Investors should enjoy the party when it lasts because it is going to create one heck of a hangover.

Source :

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules