About Me

Retired chief investment officer and former NYSE firm partner with 40 years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Sunday, October 27, 2013

Liquidity Cycle-- Looking Ahead #3 The Stock Market

The broad measure of financial liquidity from the private sector is growing about 6%. This
is faster than the real economy is growing, so there would be some modest excess liquidity
available to dabble in stocks and other select markets. But, when you add the current large QE program from the Fed, you get a turbocharged 11% growth in liquidity. With substantial fiscal
drag in place from austerity measures, and still suppressed confidence among households,
businesses and the banks in place, the economy has been very, very slow to respond positively.
In fact, SP 500 net per share for the 12 mos. through 9/30 looks to be only about $102. That
puts the "500" up at a p/e of 17.3x and above the longer run norm. The powerful run -up in
stocks since mid - 2012 reflects two factors: 1) The economy and profits have been advancing
at a snail's pace, but this performance and the expectation for eventual improvement have been
good enough to sustain positive investor confidence ("Prosperity is just around the corner").
2) The 1 $trillion annual rate of QE from the Fed has been overwhelming enough to drive
both the optimistic and the cynical into stocks.

The year ahead will probably be the last one where investors believe in the stimulative power
of QE unless the economy responds in a more forcefully positive manner. It would be another
grievous mistake for the President and the Congress to add more austerity to fiscal policy
and it could also be fatal if business again suppresses take home pay to push up profit margins.
We can only sit back and see.

The issue of the status of the QE program is now a very big deal since there is no clear evidence
the economy will avoid lapsing into a deflationary recession without it. With such a momentous
and challenging year ahead, a p/e ratio of 10x earns. and a dividend yield of 3.6% would seem
more appropriate, but that would be to fail to grasp the current power of investor confidence.

I must confess now that I am much more interested in seeing the economy perform much
better than I am in how the stock market does. The market has performed admirably since
early 2009, but the economy has not. We are approaching a point where we desperately need
a better America. The market will take care of itself if we get one.

SPX Daily Chart

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