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Bubble That Everyone Admits is a Bubble

EconMatters's picture




 

By EconMatters

 

This is one of the few times where the benefactors or professionals who benefit from the bubbles, in this case created by the Federal Reserve, fully and openly acknowledge that stock prices and certain other asset classes are completely divorced from fundamental valuations.

 

Bubble Comparisons

 

In the Dot Com Bubble there were portions of investors, mainly the traditional value investors, who voiced concerns regarding actual revenue streams of many of the technology startups, but there was at least a story that could be told that the world was entering a new paradigm with the rise of the internet, and previous valuation models were failing to grasp this new paradigm in technological advancement.

 

Unanimity & Asset Prices

 

However, even the most optimistic market participants realize that current asset prices are unsustainable without the continual had of the Federal Reserve. They just will not sell until the Fed stops sending 75, 85, 65 Billion a month in QE stimulus, whatever the light taper number becomes from the Fed at some point. It still is 65 Billion dollars of market injections artificially pushing up asset classes each month regardless of a slight tapering event by the Fed, and given that the market is naturally oriented long anyway, throw in the monthly 401k contributions, and there is no reason to fight the market – thus the bubble continues to build. 

 

 

Market Acquisitions

 

I have discussed valuations with executive management of sectors which have substantially underperformed the broader market, and they are acquisitive companies, and from a valuation standpoint their competitors are too expensive to buy. These are sectors which are up year to date 5 and 10%, well below the broader market, and substantially below the momentum stocks, but these executives will not even consider an acquisition after a thoughtful analysis. 

 

These are companies with large cash reserves that will not consider an acquisition strategy, so what do they do with this extra cash, just give it back to shareholders in the form of stock buybacks, which is ironic because they are buying their own stock at these same overly exaggerated valuation levels.

 

This further adds to bubbly stock prices as more stock shares are taken out of the market. Furthermore, this strategy almost guarantees future losses on these shares once the Fed stops supporting asset prices with 85 Billion each month. 

 

Google vs. Facebook Vying for Global Internet Dominance

 

Share Buybacks

 

Sort of like the homebuilders buying their shares back at the top of the housing market, the exact opposite strategy from an underlying valuation standpoint. The correct method is to buy back shares when one thinks that the market is undervaluing the business prospects through a substandard stock price, and not the other way around like currently exists.

 

If business was so great why aren`t these executives reinvesting this extra cash in the business itself through organic growth? The reason is that there isn`t the actual real demand for goods and services in the economy, and these same companies need to buy back shares to make their earning`s numbers look better than they are due to a sluggish 2% growth economy.

 

The Federal Reserve

 

The interesting part is private equity cannot find anything of value to buy, the professionals all openly speak about the inflated prices due to the current bubble, but yet the Federal Reserve is absolutely clueless to the environment. The Federal Reserve might want to take notice when all the major money managers are openly telling the world for all who will listen that the market is a bubble, that maybe they ought to change policy and address the bubble so that the damage from the bubble when it pops is not so crushing that it sends the global economy into a full blown 10-year recession. 

 

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Wed, 11/06/2013 - 13:10 | 4127365 ChaosEquilibrium
ChaosEquilibrium's picture

When this thing blows.....markets, economic definitions, companies will be irrelevant and the least of your worries!!!  A 10 year recession?.....as if all this debt will find market-clearing equilibrium and the metrics of value will NOT be eternally adjusted.!

Wed, 11/06/2013 - 13:04 | 4127336 RMolineaux
RMolineaux's picture

Ever since Greenspan was put into the job the Fed has neglected its regulatory responsibilities.  In the current stock market bubble the Fed should be raising margin requirements to 100 percent to reduce speculative excess.  Corporate managements are acting against their own companies' long term interest by buying back their own stock at high prices.  But such actions are great for the short term interest of these same managements to fatten their own bonuses.  Fed regulators--where are you?

Wed, 11/06/2013 - 12:48 | 4127265 WhiteNight123129
WhiteNight123129's picture

The stocks are not the bubble,

the one which can pop is the dollar and the treasuries.

So if those pop, stocks would actually go up in dollars that is but down in real terms.

 

Wed, 11/06/2013 - 12:38 | 4127211 moneybots
moneybots's picture

"The interesting part is private equity cannot find anything of value to buy, the professionals all openly speak about the inflated prices due to the current bubble, but yet the Federal Reserve is absolutely clueless to the environment."

 

TWTR

Wed, 11/06/2013 - 12:34 | 4127192 moneybots
moneybots's picture

Bubble that evreyone admits is a bubble.

 

Except for Greenspan.  Greenspan says the market is NOT bubbly.

Wed, 11/06/2013 - 09:54 | 4126474 wagthetails
wagthetails's picture

Bubble to Rubble

Wed, 11/06/2013 - 08:15 | 4126177 new game
new game's picture

very staight forward interview summarizing the tit wringer(ben the dollar printer)has gotten merica in.

http://www.counterpunch.org/2013/11/05/an-interview-with-paul-craig-roberts/print

don't look very good.

petro dolla hangin in limbo, with the mite of mic to enforce.

just a sad fuckin story...

Wed, 11/06/2013 - 07:59 | 4126166 new game
new game's picture

suck em in and pick em clean. wall streets forte.

when does one short this bitch?????

what will be the event to create the whoosh heard around the world?

hmmmm...

Wed, 11/06/2013 - 08:13 | 4126181 new game
new game's picture

BOND DUMP 

 

Wed, 11/06/2013 - 08:24 | 4126189 new game
new game's picture

we had that scare already-remember, recently when all the kings horsemen were called to dc?

to discuss the budget woes? wasn't the issue. it was time to step up the bond purchases.

orchestrated effort by bennie bucks and 19 prime dealers to keep the 10 yr under 3.

check the charts and timing.

they were in true panic mode.

Wed, 11/06/2013 - 13:47 | 4127534 NEOSERF
NEOSERF's picture

At the end of the day it is hard to believe that any large Fed decision isn't privately and quietly run by Dimon and Moynihan.  And let's face it, they have such obscure statistics about dark pools and stuff that Ben can't even dream about the impact of policy on, that in the end, when the phone is hung up, beads of sweat drip from Ben and a smile crosses the CEO's faces.  Whatever benefits banks will be what happens because without BAC, WFC, GS, JPM, MS and a few select others propped up artificially, confidence goes down, housing goes down and that 9% capital ratio offsetting bad loans is worth a piss in a poke....

Wed, 11/06/2013 - 07:55 | 4126161 Hobbleknee
Wed, 11/06/2013 - 05:09 | 4126020 DOGGONE
DOGGONE's picture

Just show people this.
"The Public Be Suckered"
http://patrick.net/forum/?p=1230886

Wed, 11/06/2013 - 05:58 | 4126056 Truthseeker2
Truthseeker2's picture

Did you say BUBBLE?!

```

 "All of us have seen bubble after bubble grow and balloon, and merge and overlap, and inextricably interpenetrate each other, until all we have is one massive bubble ready to pop.  But, when will it pop?!"

 

http://cosmicconvergence.org/?p=2019

 

Special Message to the Market Oracles and Money Masters of the Universe


 

Wed, 11/06/2013 - 04:33 | 4126004 The Heart
Wed, 11/06/2013 - 08:32 | 4126219 Hobbleknee
Hobbleknee's picture

I almost didn't click because I thought it would just be humor, but it was pretty good.

Wed, 11/06/2013 - 01:28 | 4125823 World of Debt
World of Debt's picture

PRINT PRINT PRINT!! It's a WORLD OF DEBT!! See the Hilarious Music Video "WORLD OF DEBT":

https://www.youtube.com/watch?v=99xsqxzJnXs

Wed, 11/06/2013 - 00:32 | 4125724 NihilistZero
NihilistZero's picture

A coming 10 year recession???  I'd say we're already in the 13th year of a recession for working people outside of the FIRE economy.

Wed, 11/06/2013 - 00:28 | 4125716 lasvegaspersona
lasvegaspersona's picture

Maybe you do not understand why Ben must print?

Wed, 11/06/2013 - 11:23 | 4126884 hangemhigh77
hangemhigh77's picture

So warren buttfuck, Jamie Dipshit and the rest of the BANKSTERS and politicians and elite pricks can live like kings?

Wed, 11/06/2013 - 11:23 | 4126879 hangemhigh77
hangemhigh77's picture

So warren buttfuck, Jamie Dipshit and the rest of the BANKSTERS and politicians and elite pricks can live like kings?

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