The Most Expensive Free Advice: 2014 Edition

Includes: DIA, IWM, QQQ, SPY
by: Jeff Miller

The Insightful Investor is skeptical about unsupported assertions.

It is really too bad that there is not more filtering in the rush to publication or air time. It is a function of all of those empty columns and hours to fill. The result? Certain ideas gain currency at popular blog sites and the cycle of repetition begins. The idea gets repeated so frequently that it becomes the new conventional wisdom --Wall Street Truthiness!

Recognizing these bogus ideas is absolutely crucial for the successful individual investor. Here are the most recent candidates, fresh off the presses in 2014!

  1. The Sophistry: The Fed is "taking the punch bowl away." (too many sources to cite - take your pick)

    The Reality: This is a play on the old William McChesney Martin line. It is a typical colorful and simplistic effort to convince without evidence. If you look at history, a period of zero short term rates is maximum stimulus. The recent QE efforts were exceptional both in concept and in scope. If you insist on a booze analogy, the end of QE means that the Fed is spiking the punch with 80 proof instead of 101!

  2. The Sophistry: Everyone is so bullish - sentiment signals a market top. (Many sources, but Lance Roberts is typical). Roberts cites "stark-raving bulls" and warns about what happens when all experts agree.

    The Reality: The consensus of market strategists is for a decline in market prices in 2014. FactSet's excellent summary report has this conclusion, actual data in a complete report that is a must-read:

    "Market strategists, on the other hand, predict the S&P 500 will see a 2.3% decrease in price over the next twelve months."

  3. The Sophistry: Rising interest rates will undermine higher stock prices - yet another overly simple heuristic.

    The Reality: The relationship between the P/E multiple and stocks is a bit complicated. I have often described it is curvilinear. If interest rates are too low, it reflects deflationary fears. Since no one really believe the "E" in the earnings forecasts, the multiple is low. As the economy improves - the stage where we are now - stock multiples actually move higher. The logic is quite clear, but hardly anyone understands it. You can look at my research, or if that is not convincing, you can look at this chart from JP Morgan.

As you can clearly see, rising interest rates are consistent with higher stock prices, until the 10-Year Treasury Yield gets to 5% or so.

Reader nominations for more examples of "truthiness" are always welcome!

Past entries of relevance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.