The top 25 companies listed in the U.S. now trade with an average forward PE of just under 14. Typically, PE’s contract to 8-10 during recessions and expand to 17-18 during booms. Naturally, during a most confounding period of perpetual melt-ups, the FPE’s are now mid-range, essentially threatening doom to both long and shorts.
Should the economy improve, multiple expansion will be demanded. However, if we stagnate, expect contraction. It doesn’t matter what happens to NFLX or FFIV. Those are merely side dishes in the big scheme of things. The market is dictated by the whims of large cap stocks. Stocks like AAPL, XOM, MSFT, CHL, BHP and WMT demand your attention and force obedience upon those who attempt to fight the trend.
Just to rehash what has me “confused,” to put it mildly: The Fed is telling us things are not good, by their insistence to pursue reckless monetary policy. Everyone is assuming they will succeed. However, what exactly will they accomplish? $100 tomato, $400 gas?
Personally, it doesn’t make a difference if 30 yr mtg rates are 4.25% or 5.75%. The expense is negligible. Plus anyway, it’s not like the banks will, all of a sudden, open the spigots to the unwashed, allowing unbridled real estate speculation to re-emerge. What you view as nirvana, I see as a future disaster.
If the Fed is in the business of monetizing the debt, what will happen to their balance sheet when rates go up?
Answer: 100’s of billions in losses.
Which leads me to my next assumption: rates will never go up again, ever. If you are in the camp that puts the Fed on a pedestal, you have to accept the notion that the Fed will never allow rates to climb, due to their ridiculous exposure to the bond market, at historically high prices.
If that’s the case, well then, we are Japan. The Fed is preparing for 20 years of sideways to down economic activity. Or, this QE II idea is one big bluff, in an effort to push oil to $400, which will serve as an excellent and most efficient tax hike on the proletariat. So you know, I view commodity price increases as tax hikes.
If I am right about the sinister plans of the Fed, bonds will continue to outperform and commodities will serve as a safe haven of sorts for investors. Equities could trend high, most regrettably. However, should economic activity continue to bounce along the bottom, PE’s will contract, sending the markets lower.
The only reasonable argument for higher multiples is higher rates, due to robust economic activity. If that’s the case, then QE II will never happen.If you enjoy the content at iBankCoin, please follow us on Twitter