Random Market Observations

by Wayne Ferbert on July 22nd, 2013

It is a Monday in mid-July so … why not make some random market observations? Here goes …
 
#1. There is a saying on Wall Street: “Don’t fight the tape.” The quotes used to come over the ticker machine on thin paper called the tape. When the market is going up and it is running, you want to be running with it. And the opposite is true also. You just don’t want to be fighting with it.
 
This current market is certainly an example where the tape points to one outcome: higher market values. We are zeroing in on $1700 in the S&P500. These are amazing levels – record levels, in fact. Whatever you do, whatever your hypothesis, try to give your portfolio some room to run. This tape might want to go higher. It is just too unpredictable.
 
#2 To me, the very best three bull case arguments are:
  • On a historical basis, the markets are still just fairly valued to slightly under-valued. The forward multiples are still below historical levels and with all of the record cash on the balance sheets, the enterprise value multiples are even lower.
  • Fixed income, historically the 2nd most popular asset class, offers very little in terms of compelling investment alternative. Yields are near record lows – and with rates going higher, owning fixed income just exposes you to price risk.
  • The Fed continues to pump money in to the markets and they still have lots of room to go before they could exhaust their ammo – so, “Don’t fight the Fed”
 
#3 The very best bear case arguments are:
  • The Fed is just creating a brand new bubble – this time in the equity markets. It doesn’t matter how far they take it, this bubble burst could be swift and massive in size. You can’t afford to stand in its way or try to guess when to get out if it turns down.
  • Earnings growth has out-paced most economic indicators of our country’s turnaround – at least in an aggregate view. Companies are not likely to keep growing earnings at a materially faster pace than they are growing jobs and output. Something has to give – and it might be the earnings.
  • The International economies are not in a position to help the US Markets with its growth dilemma. International developed markets show worse economic strength than the US. The Emerging markets are still growing – but they are all well out of their strong growth windows. They have reached an inflection point for growth. 
 Which case is the strongest to you? That should probably guide your hedging hypothesis right now!


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