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Examiner
  • Ron Finke: Market going up or down?

  • In order to gain better perspective, I try to read the views of both optimists and pessimists. The most important characteristic of a successful investor is the constant recognition that one may be completely wrong in his own assessments. So today I present some points from both sides of the bull vs. bear arguments.

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  • In order to gain better perspective, I try to read the views of both optimists and pessimists. The most important characteristic of a successful investor is the constant recognition that one may be completely wrong in his own assessments. So today I present some points from both sides of the bull vs. bear arguments.
    The bears are saying that the Federal Reserve Bank’s QE’s in the form of free money has already created a massive bubble in the stock market, that there is and has been no reason for stocks to rise except for its pouring gasoline on the fire. Not so, says Brian Wesbury, one of my two or three favorite economists. (By the way, did you know that if you laid all the world’s economists end to end, they would still all point in different directions?)
    Brian is the chief economist at First Trust, Wheaton, Ill. Here are his bullet points. First the Fed is not being as “easy” as many think. While the total monetary base has been inflated by 25 percent per year with quantitative easing, most of that sits in the banks unused. The M2 money supply has grown by 6 percent annualized. That may be too high, but it has not yet caused rampant inflation in most products.
    Second, private business has grown enough that the government’s spending has reduced from 25 percent of GDP to 22 percent. (I would add that the initial effect of sequestration has been positive, not negative, and this trend of lower growth of federal spending will be beneficial.) Third, based upon fundamentals like sales, profits and capitalized earnings models, the stock market is undervalued by at least 25 percent.
    Fourth, new technologies including the Internet cloud, smartphones, tablets, fracking, 3-D printing and manufacturing are boosting productivity again, and leading to new efficiencies and profits. Fifth, Wesbury says our recession was a case of government failure in housing, not market failure. At the very worst time possible, mark-to-market accounting and TARP were, in his words, huge mistakes.
    On the other hand, Jim Grant is always bearish in Grant’s Interest Rate Observer. He was a stalwart on the old Louis Rukeyser program, “Wall Street Week.” He points out unsustainable bubbles already in place or in the making due to QE’s. He includes the price of farmland, core office buildings, tradable bank debt, and particularly criticizes biotech stocks. When Iowa farmers have paid almost $20,000 per acre just to round out their holdings in the past couple of years, one has to wonder.
    In the May 3 edition, Grant cites that the Nasdaq Biotech Index has risen by 26 percent since Jan. 1 after rising 31 percent in 2012. This has added $115 billion of the 118 companies’ value in the index. What is the problem? Two-thirds of them have no profit whatsoever, and 28 percent have less than $25 million in revenue.
    Page 2 of 2 - For myself and our investing, I am erring on the positive side of the ledger. I believe most business leaders as well as average folks like us have concluded that no matter what wackos in Washington are doing, we had better do the best we can to build and grow our part of the whole. They might make it harder and harder to succeed, but we are a peculiarly stubborn people in that regard.
    (Wesbury’s comments found in blog titled, “The QE-xcuse” at http://www.ftportfolios.com/retail/blogs/economics/.)
    Ron Finke is president of Stewardship Capital in Independence. He is a registered investment adviser. Reach him at rcfinke@stewcap.com.
     
     

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