Wednesday, April 14, 2010

Pedal to the Metal in the Merry Merry Land of US

Per Zero Hedge, economists Robert Shiller and Mark Zandi believe that perhaps up to $100 B yearly is spent by consumers who have stopped paying their mortgages, or who pay much less than they owe due to modification programs. That may be 1% of consumer spending ultimately paid for by the taxpayer due to such programs as the Fannie/Freddie/Fed MBS two-step. Basically it's monetization.

Meanwhile the stock market remembers Marty Zweig's admonition and is not fighting the Fed or the tape.

Not only is this an extend and pretend rally and then some, but based on antiquated measures such as the Greenspan Fed model, the stock market can be said to be grievously undervalued. But . . . but . . . the rationalist splutters-- it's a contrivance. Treasury rates are low because the economy is so weak, not strong, and thus price-earnings ratios must account for normalized Treasury or corporate bond rates.

And the rationalist is right--someday.

Living in the immaterial world, as the (former?) Kabbala-ist known as Madonna has done, stocks are just numbers on a computer screen.

Probably the worst thing heard today was that a talking head on CNBC asserted that GOOG stock is undervalued because Baidu trades at 100 times earnings. 1999, anyone?

But as in 1999, babies were thrown out while bathwater was being promoted as perfume (or something like that!). On its own merits, the reinsurer Everest Re ("RE") trades at a big discount to tangible book value. In the early 2000s, it did so and then went wild, quickly trading at a big premium to (rising) tangible book. This sort of stuff happened like mad in 1999 and 2000. So there are both trading and buy-and-hold opportunities in the stock market, with a lot of fluff.

Re cash, a poll of economists in early 1982 showed an overwhelming preference for cash. Looking out over the next year or two, by far the worst investment class was cash, as rates plummeted. Stocks and bonds, disliked by those experts, did far better. By analogy, cash is hated and disdained, but one of these days if the economy in fact is/becomes strong, rates on cash will rise. Stocks and bonds may both fall in price and cash will then be the appreciating asset. Watch for it. Not today or tomorrow, but investors should watch for that situation.

Copyright (C) Long Lake LLC 2010

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