The markets are rigged, the Knight Capital Group (
) robots are going wild, and the cheating bankers are manipulating
Libor. I guess you might as well pack it in… right? Well, maybe
not. While mayhem continues, equity markets stubbornly grind
higher. As we stand here today, the S&P 500 is up approximately
+12% in 2012 and the NASDAQ market index has gained about +16%. Not
bad when you consider
15 countries are offering negative yields
on their bonds. That's right, investors are paying to lose money by
holding pieces of paper until maturity. As crazy as buying
technology companies in the late 1990s for 100x's or 200x's
earnings sounds today, just think how absurd negative yields will
sound a decade from now? For heaven's sake, buying a gun and
stuffing money under the mattress is a cheaper savings
Priced In, Or Not Priced In, That is the
So how can stocks be up in double digit percentage terms when we
face an uncertain U.S. presidential election, a fiscal cliff,
unsustainable borrowing costs in Spain, and S&P 500 earnings
forecasts that are sinking like a buried hiker in quicksand?
I guess the answer to this question really depends on whether
you believe all the negative news announced thus far is already
priced into the stock market's below average price-earnings (P/E)
ratio of about 12x's 2013 earnings. Or as investor Bill Miller so
aptly puts it, "The question is not whether there are problems.
There are always problems. The question is whether those problems
are already fully discounted or not."
Click to enlarge:
Source: Crossing Wall Street
While investors skeptically debate how much bad news is already
priced into stock prices, as evidenced by Bill Gross's provocative
The Cult of Equity is Dying
" article, you hear a lot less about the nosebleed prices of bonds.
It's fairly evident, at least to me, that we are quickly
approaching the bond cliff. Is it possible that we can be entering
a multi-decade, near-zero, Japan-like scenario? Sure, it's
possible, and I can't refute the possibility of this extreme bear
argument. However, with global printing presses and monetary
stimulus programs moving full steam ahead, I find it hard to
believe that inflation will not eventually rear its ugly head.
Again, if playing the odds is the name of the game, then I think
equities will be a better inflation hedge than most bonds.
Certainly, not all retirees and 1%-ers should go hog-wild on
equities, but the bond binging over the last four years has been
bond fund flows
While we may sink a little lower into the equity quicksand while
the European financial saga continues, and trader sentiment gains
complacency (Volatility Index around 15), I'll choose this fate
over the inevitable bond cliff.
: Sidoxia Capital Management ((SCM)) and some of its clients own
certain exchange traded funds, but at the time of publishing SCM
had no direct position in KCG or any other security referenced in
this article. No information accessed through the Investing
)) website constitutes investment, financial, legal, tax or other
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