Tuesday, May 14, 2013

That's the news

Now you can see why it's so hard to just ignore those big shot stock analysts at, in this case, Morgan Stanley.  I guess HOG isn't going up fast enough for those guys, so they need to pump the stock with interviews, and showing statistics that show that there's correlations between housing and Harley-Davidson stock.  I'm not going to bother researching this, but I'll bet that there is a similar correlation between just about any consumer durable product and housing starts and home prices.  And, I'm pretty sure there's also a correlation between home prices and housing starts, because if home prices are going up, homebuilders want to have more homes to sell.  Okay, so I'm just a little bit jealous because I can't go on Bloomberg TV and tell people why my price target on Harley-Davidson is so great, thus helping ensure that the outcome is what I say it will be, and making myself look more like a genius than I already do.

Wall Street jumps as banks lead S&P 500 to new high

"We're riding a self-fulfilling prophecy of momentum. There's no fundamental reason for today's move, other than the continued easing by the Fed and momentum," said Paul Radeke, vice president at Minneapolis-based KDV Wealth Management.
Yep.  And, just so everyone knows, this is exactly how bubbles start.  No, I don't think the stock market is exactly in a bubble per se,  just a bit overvalued.  I do think there is the potential for the stock market to turn into a bubble.  And I do think there is the potential for a significant reversal.  But to in order for the stock market to be a "bubble" I'd have to see some higher valuations than what I'm seeing.  Sure, there are some stocks that probably are in bubble status (AMZN comes to mind), but overall, no.  Maybe a better way to put it is we are in the early stages of bubble formation.

With that out of the way, what really caught my attention in the above linked article was this:
Growth-orientated stocks were among the day's biggest advancers, with large-cap bank stocks leading the way.
"Growth-orientated?"  You know, I've had to force myself to at least try to be tolerant of bad grammar, but I have to draw the line when it comes to professions which require writing skills.  Try "growth-oriented."

NY Fed Study: Stocks Have Never Been Cheaper

Specifically, the analysis shows equity risk premium, or the excess return that investors expect to get from stocks versus a risk-free asset, has never been lower. Of course, part of this calculation is based upon the fact that interest rates are historically low, but Baker says there's more to it than that.
This article, and the associated Fed study, probably deserve way more than a mention on my news post, so be watching for it.  This is exactly the kind of reasoning that causes asset price bubbles.  On the surface, the reasoning sounds good, but it's backwards.  The equity risk premium being low actually means investors aren't recognizing the risk in stocks.  They believe, as I pointed out in another post, that "stock markets are becoming safer," when in fact, stock markets are just as risky as always.  And another way to see it is this: when the equity risk premium starts to rise, what do people suppose will happen to stock prices?  They will fall.  So, why is the Fed publishing such nonsense?
"Clearly the Fed's motive is to put money back into equities. 401(k)s will be higher, people will feel like they've got more assets and will be spending more money," he says. "I think it's interesting that the Fed is coming out and actually using some propaganda to try and get money into stocks."
 So, while investors have been putting more money into stocks, apparently (much like the Morgan Stanley analyst talking about Harley-Davidson above) they're not doing it fast enough for the Fed.  So, the Fed fabricates a ridiculous line of reasoning about risk premia capitalizing on most people's confusion over required return versus expected return and, voila, mission accomplished.  People feel richer, spend more money, and hopefully with all that extra money being spent, corporate profits increase and it turns out that there is no stock market crash; instead earnings rise quickly enough to meet the excessive expectations that are priced into the market.  Kind of like the federal government's apparent attempt to lower potential GDP in an attempt to close the recessionary gap, rather than raise GDP.  It will certainly be interesting to see how this all works out.

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