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David Moenning is a the proprietor of StateoftheMarkets.com. In addition to providing free and subscription-based portfolios on "State", Dave is a full-time money manager and the President and Chief Investment Strategist of a Chicago-based Registered Investment Advisory firm. Dave... More
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Daily State of the Markets
  • Does Yellen See A Bubble In Stocks? 0 comments
    Nov 15, 2013 7:59 AM

    Daily State of the Markets
    Friday, November 15, 2013

    Does anyone else find the public's obsession with identifying the next bubble amusing? Almost by definition, a bubble forms - and then ultimately bursts - when no one is looking.

    To be sure, there wasn't a public outcry in early 2000 when one could purchase something like twenty of the Dow 30 stocks using the valuation of Cisco Systems (NASDAQ:CSCO) alone. No one really cared that technology stocks, many of which had no real revenues, let alone any potential for profit, were coming public with billion-dollar valuations.

    There also wasn't too terribly much concern in the mid-2000's when home prices were appreciating at a double-digit clip year after year. Nobody seemed overly worried when the ability to breathe on a glass meant you could qualify for a big mortgage on a house you couldn't afford. And next to no one sounded the alarm when scores of fishermen turned in their nets and began running hedge funds in Iceland.

    Nope, the bottom line is when things are truly rolling (and the bubbles are forming), almost nobody notices.

    Fighting The Last War

    And yet, for the last four years, everyone everywhere has had their eyes peeled for the next big bubble, which would lead to the next big crisis. In short, "We won't get fooled again!" appears to be the battle cry of cautious investors these days.

    It is especially humorous to hear so-called experts analysts talk about a bubble forming again in Real Estate. This at a time when the number of homeowners who are still upside down on their mortgages remains astounding. Talk about fighting the last war!

    Are Stocks In A Bubble?

    Then there are the perma-bears who continue to yammer on about stocks being in a bubble. The argument seems to be that since the S&P 500 is up more than 25 percent this year, up 32.3 percent in the last twelve months, and has gained 168 percent over the past four and one-half years, stocks must be bubbling over!

    Never mind the fact that valuation measures are not even in the overvalued zone at the present time, let alone at the stratospheric levels seen in 2000 - or even the levels seen in 2007.

    Never mind that the Credit Crisis bear market had crushed stocks to the tune of 56 percent. Never mind that something like half of the DJIA companies were selling at valuation levels below the cash on their books when the bear ended. So, in early 2009, one could argue that the market might have been just a wee bit "overdone" to the downside and that the levels seen on March 9, 2009 could have been artificially low.

    Nope, facts don't seem to deter the uber-bears these days. Investors got smoked twice since 2000, so naturally it is going to happen again, right?

    Inquiring Congressmen Want To Know

    Even Janet Yellen, who will likely become the next head of the Federal Reserve, was asked on Thursday at her confirmation hearing if she thought the stock market was in a bubble.

    "Stock prices have risen pretty robustly," Ms. Yellen said Thursday. But looking at several valuation measures and according to the WSJ, she specifically cited equity-risk premiums, she said "you would not see stock prices in territory that suggest... bubble-like conditions."

    Yellen went on to say that it is important for the Fed to "attempt to detect asset bubbles." But for now at least, she doesn't see any forming.

    Senator Mike Johanns (a Republican from Nebraska) apparently is keeping his eyes peeled for the next bubble too. During the Q&A session he said to Ms. Yellen, "What am I missing here? I see asset bubbles."

    On that topic bubbles bursting and systemic risk, when asked about the idea of QE creating risks in the future, Ms. Yellen said, "At this stage, I don't see risks to financial stability" from the Fed's current monetary policies.

    Oh, and then when the future Fed Chairwoman was asked if the Fed had created policies designed to specifically support the stock market, Ms. Yellen offered up a one-word answer: "No."

    However, Yellen also admitted that the FOMC is watching what happens at the corner of Broad and Wall. "We do have to take account of what's happening in the markets," Yellen said. She then added, "We are not a prisoner of the markets" and went on to suggest that the Fed would do what's right for the economy.

    So There You Have It

    So... Are stocks in a bubble? In a word, no. And for those new to the game, what's happening now is called a bull market.

    But investors can rest assured that their congressmen, most analysts, as well as the next Fed Chair are ALL hard at work looking for the next bubble. And for anyone long the stock market right now, this is probably a good thing, for as long as everyone is looking for one, a bubble is unlikely to develop.

    Publishing Note: I have early commitments Monday through Wednesday next week and will publish my morning missive as time permits.

    Looking for a disciplined approach to managing stock market risk on a daily basis? Check Out My "Daily Decision" System. Forget the fast money and the latest, greatest option trade. What investors need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets.

    Turning to This Morning...

    Word is that the 'Yellen Effect' is responsible for the improvement in global markets. The fact that the next Fed Chair sounded uber-dovish in front of the Senate Banking Committee on Thursday has reassured markets that monetary policy is not going to change and that a 'Dectaper' would seem to be unlikely. Although there is some economic data before the bell, U.S. futures are pointing to modest improvement at the open on Wall Street.

    Pre-Game Indicators

    Here are the Pre-Market indicators we review each morning before the opening bell...

    Major Foreign Markets:
    - Japan: +1.95%
    - Hong Kong: +1.69%
    - Shanghai: +1.69%
    - London: +0.37%
    - Germany: +0.26%
    - France: +0.17%
    - Italy: -0.54%
    - Spain: +0.17%

    Crude Oil Futures: +$0.15 to $93.91

    Gold: -$4.90 to $1281.50

    Dollar: lower against the yen and pound, higher vs. euro.

    10-Year Bond Yield: Currently trading at 2.720%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +3.02
    - Dow Jones Industrial Average: +25
    - NASDAQ Composite: +3.26

    Thought For The Day...

    Regardless of the colors on the screens, make the decision to enjoy your day.

    Positions in stocks mentioned: none

    Follow Me on Twitter: @StateDave


    The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

    Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

    The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

    The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (NASDAQ:HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

    Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

    Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

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