Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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

Stock-Markets

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 :http://moneymorning.com/2015/02/15/in-this-market-dont-drink-the-kool-aid/

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: customerservice@moneymorning.com

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 http://www.MarketOracle.co.uk - 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