Artificial Stock Prices - Too Fed-Dependent

George Brooks |

WHAT WORRIES ME:

With every Fed-induced rally comes the risk of an artificially valued stock and bond market and an ugly correction when the Fed goes public with QE withdrawal.

   For the most part, I have been bullish since my March 10, 2009 “buy.” And I still believe the bull has room to run, that it eventually will enter the stage that characterizes the end of most bull markets, namely speculation in small company stocks and the return of the individual investor.

   It isn’t going to get there in a straight line, corrections will occur along the way.

   One of those corrections will accompany the realization the Fed is backing away from its stimulus policy.

   That can develop if the economic recovery accelerates and jobs pick up and Fed action becomes a sure thing, or it can result from Fed commentary/action.

   Either way, the higher the stock market is driven by Fed chief Bernanke’s direct, ( or inferred), commentary that it is not close to “tapering” out of QE, the bigger the tumble when it finally does come.

   We saw interest rates shoot up and bond and stock markets plunge

immediately after Fed chair Bernanke’s comments June 19 that the Fed may begin to ease out of QE by year-end with a total withdrawal by mid-1014.

   Not only did the Fed dispatch FRB presidents for damage control, prompting a sharp rally, but Bernanke spoke again Wednesday essentially, saying accommodation will continue, though gave no specifics about easing out of QE.

   The market did what would be expected, it rallied.

   Would the market be at these levels without another goose by the Fed ?

   When the Fed withdrawal correction comes, it will come from artificially higher levels and it could get very ugly, because the Fed won’t be there to play catch.

   I think Bernanke & Co. has done a great job, but I am VERY disturbed by what I have seen over the last 30 days - INCONSISTENCY. I am not now sure it knows how to get out without major repercussions in stock and bond market. Why else would it panic last month ?

TODAY:

While the DJIA and S&P 500 hit my targets yesterday, I wasn’t happy they did.

   It suggests the level of stock prices is increasingly dependent on Fed assurance that QE will continue.

   As if it isn’t enough that the economy must breast feed, now the stock market is also fully addicted.

   WHAT HAPPENS WHEN THE FED DOES THE INEVITABLE – BACKS OUT OF QE ?

      This market is driven by hopes the economic recovery is solid but not strong enough to prompt Fed taper. That’s not a good reason for higher prices.

   There is going to be a trade off here – an accelerating economy in exchange for QE. I’ll take the economy ten out of ten times.

   But the transition from one to the other stands to be disruptive. If stock prices have been driven up sharply by continued QE, the correction in stock and bond market could be nasty, really nasty.

   The DJIA and S&P 500 could new hit all-time highs today, 15,542 and 1,687 respectively. While I think a good cash reserve is warranted now, I think that would be a good reason to increase it even more.

Investor’s first read – an edge before the open

DJIA: 15,460.92

S&P 500: 1,675.02

Nasdaq Comp.: 3,578.30

Russell 2000: 1,033.18

Friday, July12, 2013         (9:100 a.m.)

TECHNICAL COMMENTS – STOCKS:  

The following comments are based on “technical analysis,” which is intended to reflect the consensus of the Street at a given time.

Apple (AAPL: $427.28)

Wrong read. While AAPL may have gotten s boost from the overall market yesterday, it’s move up deserves respect. Late day buying reversed an attempt to slip below $426. Resistance begins at $436, but the big hurdle will be its July 23d, Q3 earnings report which is expected to show no-growth year-over-year.

   Odds favor AAPL has seen its lows for 2013, but it has had 5 false moves since its September 2012 high of $705.

   I really think management should be out there selling an image of an innovator, industry leader and great service company. What this company brings to the table is worth 12 times earnings, just because it is Apple. It sells at less than 10 x earnings, yields 2.9% and has a ton of cash. What will this company look like 3 years from now ?

FACEBOOK (FB - $25.81)

FB looks ready to attack resistance is now $26.75. The pattern here has been for sharp moves to be quickly followed by a 3-4 day correction. This move should be good for another day or two. I am raising support to $25.50.

I DO NOT OWN, NOR HAVE I EVER OWNED APPLE OR FB.

ECONOMY:

The Street is now faced with a choice – Is it hoping for disappointing reports and an increase in the likelihood that the Fed won’t back away from QE soon ? Or will it hope for upbeat reports, a sign that QE has been helping. It can’t have it both ways – For access to information including charts and graphics go to www.mam.econoday.com .

FRIDAY:

Producer Prices (8:30)   Proj. for June 13: + 0.5%

Consumer Sentiment (9:55)   Proj.: July 13 84.1 vs. 84.5

George Brooks

“Investor’s first read – an edge before the open”

 sensiblesleuth@gmail.com

……………………………………………..

The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
CAIHF Chia Tai Enterprises International Ltd (New) 0.24 0.00 0.00 0

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