While all of the major pundits are touting the great comeback of the American economy, many middle class Americans are left scratching their heads. While the stock market is all but back to its 2007 pre crash highs, labor force participation rates are at an all time low in this country with only 63.7% of Americans actually working. This is quite contrary to the belief that the great recovery is only in its infancy. What the Fed has shown is that it would rather trash the currency than let the stock market fall 20% from current levels.
This policy of propping up stocks (that only the ultra rich still own) means that the gap between rich and poor in America will likely only continue rising. While I am cautiously optimistic for many risky assets like housing, gold, silver, oil, etc ... I have to wonder if the stock market has reached a point of exhaustion. One thing is certain to me, the old trickle-down economics that so many political and economic thinkers are counting on simply doesn't work to stimulate the economy for the poor, which could ultimately result in (more) social unrest in America.
You see, Ben Bernanke and the Federal Reserve are hell bent on destroying the value of our already devalued currency. Housing ultimately has not bottomed because many homes built in the past ten years are not made to last 100 years but only 20-30 years. When left abandoned after foreclosure, that short life expectancy is even shorter -- leaky roofs, black mold, termites, etc... make the housing market less of a sure bet than it was in the 1980's and 1990's. The goal in my view for the Fed is to spike stocks one hundred percent from here regardless, but whether this actually works remains to be seen -- I would rather own gold, timberland, farms, silver, and even rental property than the ten stocks listed in this article because they are overvalued.
That's not to say that all real estate is the same -- just look at the bubble in San Jose real estate -- you can buy a $900,000 home with just 1,000 square feet of living space in that area that probably cost $50,000 to build! Talk about a raw deal.
Chipotle Mexican Grill (NYSE:CMG) -- Chipotle is a great business, in an expanding market with stellar growth and eye-popping financial statements. So why should you sell the stock now? Investors should be cautious of CMG because the momentum name is fully valued at 55X earnings and because of the product life cycle of the chain. In non-business school speak, Chipotle's concept is huge, but that concept may not be able to expand indefinitely which is what is needed to justify today's valuation. Know I have been wrong on CMG for the last 60 points or so, and I admit that the company is run extremely well. It simply is a matter of being conservative versus being greedy -- why not buy a Conoco (NYSE:COP) or a Berkshire (NYSE:BRK.A) instead?
Amazon.com (NASDAQ:AMZN) -- Amazon.com is a bellwether company, but growth relies on crushing all remaining competitors in brick and mortar retail and the rebirth of a struggling US consumer. Yes, the economy is certainly improving for the rich, but whether this trickles down to the poor remains to be seen. In an ever-globalized world much of the profits of the rich may be moved offshore. In any event, Amazon seems too good to be true with a 90 PE ratio and a cash flow statement that is questionable given rising payables and short term liabilities. The state tax issue seems to have disappeared from the mainstream media and blogosphere, but the state financial picture is not improving in a meaningful way at present.
Apple Computer (NASDAQ:AAPL) -- Now, I know Apple is a great stock, a wonderful company, and seems cheap at 10X forward earnings, but the company has some issues with saturation and competition from Android based phones that could pressure short term results. Additionally, the death of Steve Jobs certainly poses a potential headwind for the shares in the short run. That said, with the central bank printing more and more money, the I craze will likely continue into the future. I would just be cautious in the short term because I have liked the name and have been bullish on it in the past, but at some point you have to wonder if a pullback is in the cards. Nothing moves straight up forever.
Nasdaq 100 (NASDAQ:QQQ) -- Speaking of moving straight up, the QQQ is having a bellwether year so far, up around 12% year to date. The market is humming along at present, but things can change and change rapidly with the addition of the HFT super-machines into the mix. If I were long the QQQ, I would consider buying some put protection to hedge my risks, though I could see the thing breakout and go on some type of technocrat 1984 T2 Rise of the Machines type of rally. Hopefully we will remain in control of the machines for a few more years before they decide to conquer all of us -- resistance is futile here, but hedging makes sense anyway.
Russell 2000 (NYSEARCA:IWM) -- The Russell is looking weak lately, as the IWM has actually lost one percent or so over the past couple of trading sessions while the larger cap index funds have moved higher. I think the IWM is the weakest of the major averages because the companies in the index lack the economies of scale that are owned by the Apples and Googles of the world. In a world in which the strong eat the weak, I would be wary of anything small cap at present, though individual companies should be evaluated on a case by case basis. Overall, the IWM has still outperformed all of the other index funds for several years and this trend could reverse and revert to the mean over the next decade. For my money I prefer the Dow Jones.
LinkedIn (LNKD) -- LinkedIn is a great tool for business owners, entrepreneurs, brokers, sales professionals, corporations, etc., and has revolutionized the way businesses deal with social media, but the stock is just too expensive to own at 1,000 times earnings. I suggest selling call options against your long position here at the very least and if the markets start breaking south investors may want to short this stock using deep in the money puts -- buying one deep in the money put and selling one at the money put seems like a good way to capture sideways to lower price action in LNKD.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.