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Over 30 years of investing in individual stocks. Extensive business experience with small to mid-size companies, including as CEO. Many hundreds of blog posts on financial and economic matters since 2008. Focus on value with catalysts for upside price action. Background as a physician and... More
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  • Over-The-Top Cheerleading By Bloomberg, More Typical Of Tops Than Buying Opportunities 2 comments
    Nov 18, 2013 9:38 AM

    We are beginning to see high degrees of optimism as the Internet bubble 2.0 roars along. Bloomberg news mistakes deficit spending, money-printing and the weakest economic expansion perhaps in U.S. history for "resilience":

    "Resilient is the word that comes to mind in regards to the U.S.," Paul Montaquila, the fixed-income investment officer at BNP Paribas SA's Bank of the West, which oversees $62 billion in assets, said in a telephone interview from San Ramon, California. The strength of the financial markets demonstrates "the U.S. is still the preferred market of choice for global investors and the most-important engine of growth."...

    Buoyed by the Fed's purchases of assets in the debt markets, the U.S. has financed spending with record demand for Treasuries in the past four years and companies are on pace to obtain more bonds and loans than ever this year. That's bolstered the world's largest economy and pared its deficit to the smallest in five years.

    Record demand from the government agency known as the Federal Reserve, for sure.

    Meanwhile, government data say that during the current economic expansion, the average person's real income has declined substantially.

    Note the first paragraph quoted above. It talks about the "strength of the financial markets." That's different from talking about the strength of the economy.

    Now, declining oil prices and the economic benefits of fracking are indeed helping the U.S. economy. But this degree of cheerleading smells of complacency. Stock valuations are so high that a surge in the economy could harm share prices by bringing P/E's down. So, risk is high.

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  • Wubbe Bos
    , contributor
    Comments (170) | Send Message
    How can a surge in the economy bring share prices down? I always thought the only way that surging economies bring down P/E was by increasing earnings.
    19 Nov 2013, 04:40 AM Reply Like
  • DoctoRx
    , contributor
    Comments (7859) | Send Message
    Author’s reply » WBos: Because we are in this 'good news is bad news' strange situation in which the Fed diminishes or eventually ceases its monetary interventions as the economy recovers. That would allow P/E's and dividend yields to normalize, which could occur faster than earnings and dividends to be increased. Over time, of course, stocks are all about earnings and dividends. I was referring to short-to-intermediate term effects. To summarize: the Fed is inflating the money supply to make up for a weak economy. That inflation is being reflected in stock prices. Stop the inflation of money, and stock prices "should" reflect that as well. Strange stuff.
    19 Nov 2013, 11:23 AM Reply Like
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