Closing Bell Exchange
Discussing the day's trading session, and how to play it, with David Kudla, Mainstay Capital Management; Joe Tanious, JPMorgan Funds; Warren Meyers, DME Securities; and CNBC Contributor Michael Farr.
It has been historically rare for a Federal Reserve Chairman to focus much on equity prices—yet Bernanke has. In February's Congressional testimony, he said, "I don't see evidence of an equity bubble." Mr. Bernanke said stock prices don't appear to be overvalued, corporate earnings are high and equity risk premiums — the added return investors demand for holding stocks—are above normal. The dual mandates for the Federal Reserve are high employment and low inflation. Managing the appropriate level for stock prices should not be the concern of any government official or central banker.
Bernanke's approach to restoring the U.S. economy has been many faceted. The two core tactics have been to re-inflate housing prices and re-inflate stock prices. By creating wealth among Americans, the Fed hopes they will spend and hire and that the economy will grow. It strikes us as both risky and inappropriate for the Federal Reserve to establish acceptable value levels in any free-market enterprise like the U.S. equity market.
(Read More: Slow Growth Emboldens Fed to Stay the Course)
Mae West quipped that "too much of a good thing can be wonderful." While we enjoy "wonderful" as much as anyone, we are reminded of the first commandment of investing: buy low and sell high. No matter what the Federal Reserve says, the appropriate level for stock prices cannot be determined by simply taking a quick snapshot of the market's price-to-earnings ratio. If it were that easy, anyone could do it! As we mentioned last week, the Fed must (at the very least) consider that profit margins are near record highs. Adjusting the 'e' in 'p/e' to a more normalized level would increase the market's p/e multiple substantially. However, we acknowledge that markets that become overbought can become a lot more expensive and euphoria can last a long time. The question is: Will the enthusiasm for stocks last long enough for the fundamentals to improve In other words, can the Fed successfully prime the pump such that economic growth (and thereby earnings growth) improves and gives investors something tangible to get excited about?
Disciplined investors can always make money over the long-term if they invest in the right things. Color us cautiously optimistic, and be careful out there!
Michael Farr is a contributor for CNBC television and has appeared on numerous broadcasts and has been quoted in global publications. He is a member of the Economic Club of Washington, the National Association for Business Economics, The World Presidents' Organization, and The Washington Association of Money Managers. He is the author of "A Million Is Not Enough," and "The Arrogance Cycle." His new book, Restoring Our American Dream: The Best Investment, debuted in book stores on March 30.
31 May, 2013
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Source: http://www.cnbc.com/id/100384476
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