Stock Market Bubble Warning
Stock-Markets / Stock Markets 2014 Jul 29, 2014 - 10:38 AM GMTBy: Barry_M_Ferguson
Everyone has an opinion as to whether or not US stock indices are in a bubble at the present (July, 2014). Given a moment’s reflection, I came up with ten reasons US stocks are indeed in a bubble.
1) Fed Chair Yellen expressed concern in mid-July (2014) that certain asset classes appeared to be stretched in terms of valuation. The three that she mentioned were social media stocks, biotechs, and small caps. This is a bit disturbing on several levels. First, Fed people are bankers and not economists or investment experts. As bankers, the Fed only knows one thing. That is, they have the power to steal money from a sovereign Treasury and give that money to their banker friends who help the Fed to control the world. Second, Ms. Yellen may indeed be correct.
Maybe the asset classes that she mentioned are at least expensive if not bubblicious. Third, the Fed no credibility for anything other than being a master manipulator of asset prices that results in wealth inequality. In other words, the Fed and their bankster friends get all the wealth and the rest of us get all the work. It seems to me that Ms. Yellen is free to voice an opinion concerning valuations but once inclined, Ms. Yellen needs to look at the biggest bubble in the history of the world - the US Treasury bonds. Yet, this is the very asset class that Ms. Yellen and her predecessors have worked so hard to manipulate into a bubble. And oddly, there is no one in the solar system that would argue against this. Does Ms. Yellen not see a bubble in Treasury Bonds? Is Ms. Yellen trying to misdirect our attention from the Fed’s own personal bubble? Does Ms. Yellen think we are all Pelosi’s? Yep, we are in a bubble.
2) Greece is still borrowing at about 8%. Jamaica is about to issue government bonds and it is estimated that they will carry an interest coupon at about 7%. Argentina is still borrowing. Greece is broke and in a permanent depression due to their ECB life support. Jamaica has defaulted twice in the last three years. Yet, they still borrow at only 7%. Argentina is currently in default talks with a US hedge fund. And further, the US is currently borrowing at 2.5% while the Treasury is $17.5 trillion in debt with no hope of ever repaying any of it. When broke, bankrupt, defaulting governments borrow at less than 10%, we might be in a bubble.
3) Q1 US GDP was reported to be down 2.9%. To date, the major US indices are positive for the year. Given that GDP is merely a function of money velocity times money supply, and given that the Fed that has been producing money supply is now cutting back, there is no chance that GDP could possibly pick up enough to justify current stock valuations. Yep, we are in a bubble.
4) The stock price for AMZN is over $320 and Amazon has no P/E because it has no E. The company just recently reported more losses. Why is the price so high? Because Amazon is the sixth largest holding in the Nasdaq 100 and represents 4% of the index.Yep, we are in a bubble.
5) Speaking of the Nasdaq 100, the index is up 11% year-to-date as of this writing. The idea is that the rest of the world is mired in a no growth economic environment. Therefore, the transnational companies will suffer as they do business with the rest of the world. Smaller companies that make up the Nasdaq don’t have as much international exposure so they should have an earnings advantage over their Dow brethren. However, the logic breaks down as the Russell 2000 is down 2% over the same time span while emerging markets are up 8%. Don’t try to understand it. We are in a bubble.
6) The death of Apple. Yes, we are witness to the destruction of one of the great companies in the world. If readers use Mac computers, they know the advantage of these machines. However, if readers have upgraded to the new Mac operating system known as ‘Mavericks’, they have seen the beginning of the end. It seems that something has gone terribly bad at Apple for them to put out pure garbage. Mavericks is so bad, that in my opinion, it is, and pardon me for using profanity here, but Mavericks is so bad that it feels very, well, Microsoft-ish. Unless Apple trashes this piece of garbage, fires every person connected with it, and quickly comes out with a more Apple-like system, the company may be doomed. Yet, the stock price continues to rise. Yep, we may be in a bubble.
7) Since June 1, 2014, gold is up 4% and gold miner stocks are up 20%. Given that the Fed will continue to withdraw stimulus, the dollar should continue to strengthen. Stronger dollars usually work against gold prices. Will miners continue to rally? Yep, we might be in a bubble.
8) Caterpillar and Joy Global make mining equipment. Both reported slow sales and both gave no expectations of a revival. Both report that business is slow and not getting better. Yet, miners still rally. Yep, we might be in a bubble.
9) Economic data has been replaced by economic propaganda. Good news is followed by bad news. Bad news is followed by good news. That way, investors just stay confused. For example, we were told in July that existing home sales were up. New home sales were way down. Next month, the regime will reverse that news. Existing home sales will be down and new home sales will be up. This will be announced in spite of the most recent data that contracts were down. Truth doesn’t matter to a liar. Likewise, durable goods orders were up in July. However, the previous increase for the month of June was revised to a negative. Good news, bad news, good news. It’s just news. It’s just propaganda. No of us can handle the truth. Yep, we might be in a bubble.
10) I have included the chart below that shows the Dow over the previous 2.5 years on a monthly basis. We can see the non-stop ascent of the price of the index. We can see that there have only been 6 negative months during the period. Several of those were only mild declines. Since the Fed has come to the rescue of equities time and time again, investors have clearly decided that there is no risk in stocks. Ms. Yellen chided investors for not respecting risk. However, this is like Santa Claus bringing toys to us every Christmas morning and then chiding us for expecting such gifts. If Ms. Yellen would like investors to respect risk again, maybe she shouldn’t show up on Christmas Eve.
But one thing from the chart below should be a major red flag. That is, the Dow index continues to move higher and higher as the volume of trading continues to move lower and lower. There are many reasons for this and the main reason is that the Fed has implemented the PPT strategy so often that they have convinced would-be sellers of stock that selling stock is a losing proposition. The Fed stands ready to bring pain to sellers. Every morning at 10:15am the Fed commences with its POMO activities. They conclude such activities at 11am. Stock prices always rise during this period. Only buyers remain. At any cost. At any price. Take away sellers and stocks will always rise. Yep, we might be in a bubble.
DJIA - 2.5 year monthly chart
Chart courtesy StockCharts.com
Barry M. Ferguson, RFC
President, BMF Investments, Inc.
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Barry M. Ferguson, RFC is President and founder of BMF Investments, Inc. - a fee-based Investment Advisor in Charlotte, NC. He manages several different portfolios that are designed to be market driven and actively managed. Barry shares his unique perspective through his irreverent and very popular newsletter, Barry’s Bulls, authored the book, Navigating the Mind Fields of Investing Money, lectures on investing, and contributes investment articles to various professional publications. He is a member of the International Association of Registered Financial Consultants, the International Speakers Network, and was presented with the prestigious Cato Award for Distinguished Journalism in the Field of Financial Services in 2009.
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