Thursday Outlook: Commodities, Global Markets

<< Return to page 1 - An Equity Bubble in the Making?

The flood of earnings and economic data continues. Not all of these will be good. But bulls have the ball and own the tape so they can spin it any way they want. The low volume, given the headlines, is disturbing and still means most individual investors are sitting this one out. The declining dollar means US stocks are cheap to Europeans and no doubt they’re contributing to this mania along with hedge funds and trading desks.

When you look at earnings from big banks, most of the positive results are from trading—and they’re trading your money via TARP and other taxpayer money. The media pays little attention to this, since for the most part, they’re conflicted. If Glass-Steagall restrictions were in place we wouldn’t be seeing banks and brokers trading the snot out of stocks and derivatives. From a regulatory view, this is where it’s all gone wrong and another bubble is in the making.

Remember, stocks can inflate just like anything else.

Let’s see what happens and in the meantime you can follow our pithy comments on twitter.

Disclaimer: Among other issues the ETF Digest maintains positions in: SPY, UPRO, MDY, IWM, TYH, XLB, UYM, XLF, FAS, XLY, UDN, GLD, DBC, XLE, EFA, EFO, EEM, EDC and XPP.

The charts and comments are only the author’s view of market activity and aren’t recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations aren’t predictive of any future market action rather they only demonstrate the author’s opinion as to a range of possibilities going forward. More detailed information, including actionable alerts, are available to subscribers at www.etfdigest.com.

Comments

[bbro:]

Markets are of course driven by emotions but this market is not
overvalued compared to GDP,Net corporate cash flow,Personal
Consumption or Corporate profits ( basically all NIPA accounts)....

Oct 15 06:50 AM

[tunaman4u2:]

And the numbers you are seeing are real? The USD will fall forever? Unlimited budget deficits, unemployment benefits, stimulus packages, rebates are sustainable?
Good stocks like INTC, MMM, CAT, BA, MCD, WMT, AAPL all are at pre-recession 2007 levels. They are propped up by temporary government actions & not real sustainable growth.
Thats the definition of a bubble.... where valuation exceeds the long term fundamental realities.


On Oct 15 06:50 AM bbro wrote:

> Markets are of course driven by emotions but this market is not<br/>overvalued
> compared to GDP,Net corporate cash flow,Personal
> Consumption or Corporate profits ( basically all NIPA accounts)....

Oct 15 07:24 AM

[Seeking Advice:]

Really sems hard to know how to invest right now, Dave. I do believe that we're seeing an equity bubble. And it seems that the Government is purposely fostering it as a way to increase confidence and allow the big banks to increase their value. The government is devaluing the dollar which makes all comodities rise and the zero interest rates make it impossible to get any return on cash. Hence, the tendency for money to find its way to riskier assets like equities as everyone searches for a way to get some kind of return. It seems so simple in way, though it's not.

As a flexible buy-and-holder, I've been sliding up and down on my equity exposure based on apparent risks (which seem high). And while my exposure is lower for sure, fortunately I have not sold off so I've floated along with the rising equity tide. I keep asking myself how long things can continue and then remind myself that the market can stay irrational for a long time, especially if conditions are pressuring it in that direction. I'll keep reading you're comments as part of how I try to stay informed.

Oct 15 07:53 AM

[buyitcheap:]

Retail reallly drives volumes? Is it that mutual funds couldn't sell fast enough during last winter and March?

I tried to get short in july and had my arse handed to me. The dollar is being completely abandoned and will continue its decline absent an actual statement and subsequent action of any kind to the contrary. Weak dollar low rates, and asset reflation is the order of the day.

As a result, the banks will be "fine" nominally speaking, rates are going to stay low (banks are the annointed class you know) and ,metals/commodities and ex-US will be the places to be. Crap? to be sure. But acting logically has cost me a bundle.

Oct 15 08:01 AM

[Gerry Sullivan:]

Much of "the crowd" (myself included) thought the market was
undervalued when the Dow Jones Industrials broke below 10,000
on the way down 12 months ago. That was Oct 6, 2008.

Now "the crowd" (at least the majority on Seeking Alpha) thinks the market is overvalued at the same level.

I see the pre-market looks lower today and tomorrow is the last day for trading Oct options, so a pause here makes sense. But, ask yourself what you thought in early Oct 2008.

Which market was more favorable for going long, Dow 10,000 in early Oct 2008 or Dow 10,000 yesterday?

Oct 15 08:34 AM

[bbro:]

Are you a conspiracy theorist????


On Oct 15 07:24 AM tunaman4u2 wrote:

> And the numbers you are seeing are real? The USD will fall forever?
> Unlimited budget deficits, unemployment benefits, stimulus packages,
> rebates are sustainable?
> Good stocks like INTC, MMM, CAT, BA, MCD, WMT, AAPL all are at pre-recession
> 2007 levels. They are propped up by temporary government actions
> &amp; not real sustainable growth.
> Thats the definition of a bubble.... where valuation exceeds the
> long term fundamental realities.

Oct 15 08:58 AM

[MikeD71:]

An Equity Bubble in the Making?

YA THINK?! Ya know, this would be comical if it wasn't so dangerous. In the end, Dow @ 10K yesterday will prove a horrible thing down the road. A psycholgical number...meaningless to most, injecting even more confindence where none is warranted. There has been no shortage of confidence as it is. And confidence in what? We have solved NONE of the problems that put us here. In fact, we have only exacerbated them. Did I not just see that foreclosures have broken a new record? Is unemployment stable, or ANY hope of stabilizing? Are consumers feeling good? Are the banks stable? Good grief. DJIA at 10,000 is going to draw people into the snake pit. I wouldn't be surprised to see a run to 12-13K. Eventually the realization will set in. And that is that this run up, based on mood ALONE...has been a terrible mistake. And those that took the bait, are going to be consumed.

Oct 15 09:00 AM

[tunaman4u2:]

Nah I just don't get the high valuations and expected growth rate when the current earnings are based on temporary government plans & a dollar panic. Have a hard time buying stocks that are valued at 2006-2007 levels and ignoring the differences in the economy between then & now ie employment, housing etc.


On Oct 15 08:58 AM bbro wrote:

> Are you a conspiracy theorist????

Oct 15 09:32 AM

[mws:]

Art Cashin (the head of floor operations at UBS) on the topic of a 10,000+ DOW, stated, "It's nice, it's somewhat joyful, but it's also a reminder that in a buy and hold strategy, we haven't gone anywhere in 10 years."

Mr. Cashin also mentioned that shortly before St. Patrick's Day, he called for a massive rally but never dreamed there would be anything like this and that he "started taking money off the table in July." Mr. Cashin also said, "Everybody's looking for a pullback -- perhaps that why it won't come."

And, sporting a bit of tongue-in-cheek humor, his departing comments were, "It's been painful to even have got out early or not been in it. It's like being at a great party, you're looking at a banquet and you think that the food is tainted. So you're watching everyone having a good time and you're not doing it."

See the interview for yourself at: cnbc.com/id/33315124

Oct 15 09:40 AM

[Bull Run:]

The US economy is built on excess and bubbles. why would it be different this time??

Oct 15 09:48 AM

[bricki:]

Is it a bubble now? Probably not. Look at the Schiller P/E charts and we are at a reasonable valuation given earnings and interest rates.

Could it become one? Of course. If earnings stop growing and the Fed tightens then kerplunk. Will that happen? Who can say but I don't think we will see it while unemployment is so high. The political cost to tightening fiscal policy while unemployment is this high would make it impossible.

So keep money in equities but note a wise man goes into the fray with plans for all exigences.

Oct 15 10:15 AM

[AndrewBaker:]

Equity bubble: Yes, absolutely. What amazes me is that so many people who are financial literate can know this and yet the market keeps going up - today excepted, I predict - and taking in money which will dissipate so quickly when the drop comes.

This is "bigger fool" investing at its best or worst, depending on which side of the trade you're on when the music stops.

Oct 15 10:33 AM

[robert.b.fe...:]

Those great numbers from intel (INTC) probably reflect Da Boyz buying new HAL 9000s to celebrate fooling us all again.

Oct 15 10:57 AM

[bbro:]

Sounds like you are picking numbers to believe why do you believe
numbers on employment and housing compiled by government entities and not numbers on corporate cash flow, net profits, consumption compiled by government entities.

On Oct 15 09:32 AM tunaman4u2 wrote:

> Nah I just don't get the high valuations and expected growth rate
> when the current earnings are based on temporary government plans
> &amp; a dollar panic. Have a hard time buying stocks that are valued
> at 2006-2007 levels and ignoring the differences in the economy between
> then &amp; now ie employment, housing etc.

Oct 15 11:26 AM

[David Fry:]

GS earnings were, as predicted, based overwhelmingly on trading. Your tax dollars at work.

Oct 15 11:42 AM

[oldman:]

Always enjoy your charts. Thanks.
But no inverse or double inverse funds as a hedge?

Oct 15 01:57 PM

[ebworthen:]

An equity bubble in the making?

Short answer: Yes

Long answer: Yes

Creating the bubbles has become the modus operandi - versus the unforseen consequence.

Oct 16 10:15 PM

[TRYKtrading:]

is it this difficult to just call the market too high?

do we need all the charts to see it?

no. go short. duh.

Oct 21 07:59 PM