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
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Will the Fed’s Spending Drive Stocks Back Up to Pre Credit Crash levels?

Stock-Markets / Stock Markets 2010 Oct 06, 2010 - 06:51 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleJon D. Markman writes: The Standard & Poor's 500 Index is up more than 10% in the past month, and it finally looks like all of the thin threads of strength we've seen over the past few months are starting to twine together into a single rope that may be strong enough to pull stocks back up to pre-crisis levels.


The key threads are:

•The ECRI Weekly Leading Index has stabilized and turned higher.
•The U.S. Federal Reserve announced that it had made an epic change in its outlook, targeting deflation instead of inflation.
•Emerging markets and commodities are leading other markets higher, as we have seen for two months.
•Demand for stocks has increased while supply has decreased.
Even if you are skeptical of these developments, remember one thing: The Fed has absolutely flooded the financial system with money.

Banks and large companies have hoarded most of those funds so far, leading gross domestic product (GDP) growth to stall. But the Fed essentially said last week that it is going to double down. The central bank has never had a $1 trillion balance sheet, but it could have a balance sheet twice that size by this time next year if it goes through with its plan.

This money ultimately will be put to productive use, and eventually, it will leak out into the stock market as speculative investment and nurture inflation.

My guess is that any decline from here will be shallow because the central bank has issued what traders are calling a "Bernanke put" - a takeoff on the "Greenspan put" that was believed to underlie the market in the 2000s.

A put is a derivative that swells in value if its underlying instrument goes lower in value. So the idea is that if the economy goes lower, Bernanke's efforts to save it will get larger. This should create a cushion of safety - real or imagined - especially if it is increasingly seen to be "at the money," or triggered by near-term events.

We can mutter about it under our breath and wonder if it's the right thing to do, but it's happening nonetheless. So what I want you to grasp is that the greatest financial bubble in the history of mankind is being formed right in front of our eyes. And the only sensible thing to do is take advantage.

The prospects for the S&P 500 to return to its pre-crisis levels above 1,200 - its level prior to the September 2008 Lehman Brothers Holdings Inc. bankruptcy - are better than ever. In fact, it would not surprise me in the least to see the entire U.S. bear market repealed by the end of 2012. It already has been swept away in many overseas markets, so it's just a matter of time before it happens here.

Skeptics say that the Fed is "pushing on a string" with its plan to flood the system with money because there is not enough demand. But that concern ultimately will vanish as entrepreneurs - enticed by reward and propelled by ambition - will find ways to put the money to work.

It happened in the 1990s, when the Fed flooded the system with money in the wake of the late-1980s savings-and-loan crisis and 1990 recession. Investors were skeptical in the first few years, but the markets ultimately increased five-fold by 2000.

You may recall that period began with the Internet being strictly used by academics and the military, and ended with an incredible boom of the consumer web, which led to billions of dollars in wealth creation and tens of thousands of jobs. However, we are currently in the midst of a commodities bubble that is similar in scale.

Just to get an idea of what I'm talking about consider this anecdote: One of my hosts in Pittsburgh told me about the business of his son-in-law in Lansing, Michigan. The young man graduated from high school a dozen years ago and went to work for his father's tool-and-dye business as an apprentice. Before long he was a master toolmaker and took over the business.

When the recession and credit crisis hit, his local bank was taken over by a larger national bank that decided to pull his line of credit. That would have been fatal to a small company that often had to buy equipment before it could bill for the products that it would create. But the young man didn't fold; he was resilient. He persuaded another local bank to give him credit, and after several lean months discovered that one of his biggest customers, Pratt & Whitney, had won major new bids of its own to supply engines for jets that were sold to Asian and Persian Gulf customers suddenly flush with money from the commodities boom.

That small business is now on track to hire a new employee a month, and expects to be able to more than double its business next year.

So you can see where I'm going: Rise in commodity value = more money for commercial airliners in under-served emerging markets = demand for more engines = demand for more parts = improvement in financial condition of a Michigan manufacturer = more skilled jobs in Lansing = more money to buy houses and cars and spend in restaurants. Several major industrial manufacturers, like The Timken Co. (NYSE: TKR), are already at new highs.

I realize that this may be overly simplistic, but it's real.

Sometimes investing decisions are hard, and sometimes they are not so hard. Right now it's the latter. The Fed sees weakness in the economy and employment, and has vowed to fight them. It has never lost such a battle, though sometimes the effort is prolonged.

More simply, the price/earnings (P/E) multiple for companies in the S&P 500, such as Johnson & Johnson (NYSE: JNJ), is around 13. Given the current level of inflation and interest rates, the average PE of the average large company should be 20-times, and some sober, veteran investors and academics argued over the weekend at a major economics conference organized at Princeton University that it should be 25-times.

This means that prices should be twice as high right now, all other things being equal. That's a bit extreme, but you get the point. All that is missing is a return in confidence - and that should not remain scarce for long.

Source : http://moneymorning.com/2010/10/06/stocks-3/

Money Morning/The Money Map Report

©2010 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 72 hours 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