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

Danger: Resist the Temptation to Chase Stock Prices

Stock-Markets / Stock Markets 2015 Apr 05, 2015 - 07:20 PM GMT

By: Money_Morning

Stock-Markets

Michael E. Lewitt writes: The week running up to Easter ended with a punk jobs report that punctuated a first quarter filled with a stream of consistently bad economic data.

March nonfarm payrolls grew by only 126,000, far below consensus estimates of 225,000. Worse, 69,000 jobs were subtracted from January's and February's tallies. The unemployment rate stayed at 5.5% only because the job participation rate jumped back up to its lowest level since 1978.


And while the *****-eyed optimists who are waiting for the economy and the markets to reach escape velocity like Vladimir and Estragon are still waiting for Godot were rushing to blame the number on the weather, the government reported that 182,000 people reported they couldn't get to work because of the weather in March – in line with historical norms.

It isn't the weather that is hurting the economy…

It is the strong dollar and the crushing weight of debt that are preventing businesses from hiring new workers, building new factories, and starting new R&D projects. Instead, they are buying back their own stock to prop up their own stock prices and holding on for dear life.

No, Really. The Fed Is Robbing You…

Stocks were basically flat on the holiday-shortened week, with the Dow Jones Industrial Average (INDEXDJX:.DJI) and S&P 500 (INDEXSP:.INX) both up 0.29% and the NASDAQ Composite (INDEXNASDAQ:.IXIC) down -0.09%.

Futures were down sharply on Friday when the markets were closed, however, so the opening on Monday could be ugly. In sharp contrast, the bond market rallied after the March jobs report, driving the yield on the benchmark 10-year Treasury bond down to 1.81%.

Investors are moving back their estimates of when the Fed will raise rates to September from June, and more are arguing it won't happen until much later this year if at all in 2015.

The only certainty with respect to what the Fed will do is that they will screw things up. It should have raised rates a long time ago. Low rates are no longer boosting the economy; they are holding the economy back by reducing the incentives for banks to lend to productive projects and depriving savers of a just return on their capital.

Zero interest rates have reduced the cost of funds for the $15 trillion U.S. banking system from roughly $500 billion to only $50 billion annually, depriving savers of $450 billion of annual interest income. This policy is contributing to sluggish income growth and will ultimately make it impossible to justify current asset prices.

A Happy Ending Isn't on the Cards

Either the Fed will start raising rates, and markets will react, or the Fed will feel it has to wait because the U.S. economy is too weak to handle higher rates. Either way, it is difficult to see a positive trajectory for the stock market in the period ahead.

With first quarter GDP expected to come in close to 0%, and S&P 500 earnings estimates continuing to fall due to a combination of lower oil prices and dollar strength, the outlook for equities remains muted.

Goldman Sachs maintains a year-end S&P 500 target of 2100, 2% higher than the index's current level. Valuations are extended with the forward earnings multiple at 18x and other measures such as the S&P 500 Market Cap/GDP and Shiller Cyclically Adjusted P/E Ratio at well above historical averages.

The models of highly respected market strategists like Rob Arnott at Research Affiliates and Jeremy Grantham at GMO project 0-2% 10-year returns for both U.S. stocks and bonds. Investors are going to have to find very skilled managers or unique alternative strategies to flourish in the next decade. Those counting on continued stock market gains supported by Fed-liquidity are going to be very disappointed.

Investors Need to Understand This

While U.S. stocks were mixed in the first quarter, the real action was in Europe and Asia where markets skyrocketed in both local currency and dollar terms. In the first three months of 2015, the S&P 500 ground out a 1% total return (price plus dividends) while the Dow Jones Industrials lost 2% and the Nasdaq gained 3.5%.

In contrast, the German DAX soared by 22%, its best performance since its creation in 1988, and the FTSE Eurofirst 300 Index (INDEXFTSE:.E3X) climbed by 16%, boosted by the European Central Bank's QE program and the collapse of the euro from $1.20 to $1.07 during the same period.

The MSCI Asia Pacific Index soared by 7% during the quarter also driven by expectations of further monetary easing in Japan and China. Unhedged dollar investors enjoyed lower but still high single digit returns that blew away their investments in the U.S.

The markets are telling a story that investors need to understand.

That story is that the only growth that is occurring in the global economy is coming from central banks keeping interest rates at zero (or below zero in Europe where $3 trillion of debt now trades there) reducing the value of their currencies.

European and Asian markets are not rallying because of robust organic growth in those regions. They are rallying because companies in those regions – primarily exporters – are benefitting from cheaper currencies that allow them to sell more goods abroad.

In the U.S., companies are buying back massive amounts of stock (though there is currently a seasonal lull tied to the earnings season that will likely result in stock market weakness) financed with low cost debt that allows them to artificially pump up their earnings without having to grow them.

Junk bond borrowers are not generating enough free cash flow to repay their debt but aren't defaulting on those debts because their borrowing costs are extremely low. Moody's is forecasting a 2.9% default rate in 2015, far below the 4.5% norm of the last 20 years.

The story is that the global economy is addicted to low interest rates and cheap currencies, not that that it is growing organically or productively.

There is a race between the incredible innovation in digital technology that is shaking the world and the dead weight of debt and brain-dead economic policies that are threatening to push the global economy into another financial crisis.

Add to that race the most unstable geopolitical situation in nearly a century and investors should be battening down the hatches, not chasing stock prices higher.

It is a story that is going to have a very sad ending for those who fail to understand it.

Source :http://moneymorning.com/2015/04/05/danger-resist-the-temptation-to-chase-stock-prices/

Money Morning/The Money Map Report

©2015 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