Inflation Expectation Tuesday: Money Managers Have An Inflated Sense of the Future… So Buckle Up!

Barron’s recently unveiled the results
of its latest “Big Money Poll” on
November 1.

Boy was it a
doozy.

According to
the magazine, 60% of money managers are bullish on the stock market’s
performance through June 2011. All in all, the bulls expect the market to rally
6% over the next seven months.

The reasons
given for this bullishness ranged from delusion ("Stocks are cheap based
on historical price-to-earnings ratios,") to the outright insane (“I see
no justification for a double dip.”) Altogether, 53% of money managers think
stocks are UNDER-valued.

The problem
with the “stocks are cheap” argument is that it’s based on the S&P 500’s
P/E ratio of 17. Now that’s not a bad number except for the fact that
Financials account for 15% of the S&P 500 index (second only behind Tech at
19%) and anyone who claims that they know what the REAL earnings are at
financial companies is flat out lying.

When a
sector throws every and all accounting rules out the window and is allowed to
value itself at whatever it likes, there is no end to the gimmickry that can be
used to craft great earnings (such as claiming profits based on the fact that
bond prices have fallen and the company could allegedly buy them back at a
profit).

So that’s
15% of the S&P 500’s P/E that is flat out fictional if not fraudulent. As
for the claims that there’s “no justification for a double dip,” well,
technically it’s correct given that we never actually had a REAL recovery, so
the ongoing collapse isn’t really a double
dip.

After all,
let’s not forget that the “stocks are cheap” crowd are the same folks who bet
big on stocks going into 2008. Indeed, back in late 2007/ early 2008, Barron’s surveyed 12 Wall Street
strategists. Every one of them forecast
that stocks would head higher in 2008. The forecasts ranged from an increase of
3% to 18%, with the group’s average forecast at 10%.

That
forecast turned out great. The market dived over 30%.

So why are
money managers so bullish through June 2011? The date, of course, is not
random: June 2011 is when the Fed’s QE 2 program is scheduled to end. Since QE
has done nothing but ramp stocks for over 18 months, it’s not surprising that
money managers assume more QE equals higher stock prices.

Or does it?

In point of
fact, betting that the Fed can keep stocks elevated forever is moronic. The Fed
has been pumping the market to the tune of $9-10 billion PER WEEK ever since QE
2 was announced and the market has already dropped some 3%.

Indeed, it’s
not getting to the point where we can have TWO POMOs in one day and still
barely close in the green (see yesterday’s action). Seriously, at one point do
investors start to wake up and realize the Fed has solved nothing with its
policies and in point of fact has made the financial system even MORE
dangerous.

The whole
world is realizing this in slow motion, Europe is imploding, China is
desperately trying to cool inflation, and the US DE-pression is about to fall
off a cliff as millions of its citizenry lose their unemployment benefits and
become derelict.

And somehow
the S&P 500 will rally 6% from this? Give me a break.

Good
Investing!

Graham
Summers

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Comments

[Frozen IcQb]

Interesting point: the USDX could actually go up while the USD loses purchasing power as a result of competitive currency devaluation.

[MarketTruth]

All in all, the bulls expect the market to rally 6% over the next seven months.

And USD IDX will go down how much as the usual USD/Stock link occurs.

Gold and silver will go up how much? Gold is up 16% USD in the past year and 32% as priced in Euros. 

[Frozen IcQb]

The economy is circling the bowl and USD with it thanks to the Fed's QE and massive goverment spending. As the USD falls, capital will flow to stocks as a hedge against a loss of purchasing power. Equities will go up, but not neccessarily in real terms.

[apberusdisvet]

Aliens have landed and spread pixie dust on Wall Street and bankers are riding unicorns;  silver coins scattered on the streets; hookers have solid gold vagina rings.

[IQ 145]

 "Merril-Lynch is Bullish on America !"; no wait, they went bankrupt.

[dnarby]

I get to be first!!!   Yaaayy!  A first for me.

Good stuff, I'm thinking that POMO isn't even being used to buy stocks as of 11/12/10.