Stock Prices Are Not What You Think They Are

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The festering sore that is the global monetary system is getting worse. Not that you’d know by looking at stock prices. If you take a credulous look at recent activity, you’d think that the state of the world is actually improving. But it’s a long time since prices last imparted any real knowledge of what a business may be ‘worth’. These days, stock prices simply tell you the direction and force of tidal capital flows.

Unfortunately, there is no longer a market ‘moon’ exerting a natural regulatory force on these flows.

In today’s Daily Reckoning, we’ll explain why things are getting worse, and point out the signs (actually, sign) of deterioration to keep your eyes on. And be sceptical of stock prices…they’re not telling you what you think they are.

Speaking of stock prices, you know sentiment is pretty good when you see bold and confident headlines such as, ‘Shares: What to Buy in a Correction’. We noticed it in the Weekend Financial Review, but didn’t bother to find out which shares to buy.

We’d be more interested in an article that read, ‘Shares: What to Dump as This Rally Gets Out of Hand’. But we’re not going to see anything of the sort. The bull has worked up some momentum these past few months. A vertiginous price drop of 120 points in a day isn’t some sort of sign of the fragility and speculative nature of the stock market. It’s not a warning shot for people to pull their heads in. No, it’s a correction to buy!

And the bulls are probably right, in the short term at least. Momentum works when everyone believes in it. Put another way, when capital flows in a certain direction (towards stocks) it doesn’t reverse easily.

But it’s worth thinking about who caused the panicked dump of stock last week and why. Well, we know the Fed caused it in their attempts at monetary vigilance. Why? They’re concerned that financial markets divorced from economic reality long ago and that things could really get out of hand again.

It’s also worth asking whether the erroneous price signals resulting from the speculation, which in turn results from the Fed’s green light, are once again sucking the retail investor back into the stock market just as the pros (the speculative hedge funds) eye an exit.

We had a chat with a mate last week. He’s a financial adviser with a big four bank. He told us a story about a potential client who had money to invest in the stock market ‘because it was going up’ and was looking to double it in a few years. But he still wanted safety, of course, the banks, yield etc.

He also told us how borrowing to buy property in a self-managed super fund is all the rage too. Hmmm…dumb money is not the right term. This market will catch out much smart money too. We’ll call it ‘hapless money’.

Regards,
Greg Canavan
for The Daily Reckoning Australia

Join me on Google+
From the Archives…

High Tide on Main Street?
22-02-13 – Bill Bonner

The Fed’s Funny Money is Losing its Mojo
21-02-13 – Dan Denning

Resurrecting BHP, the ‘Big Australian’
20-02-13 – Dan Denning

End of the Australian Boom?
19-02-13 – Satyajit Das

Bond Guru Still Likes the Unthinkable: US Treasuries
18-02-13 – Chris Mayer

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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2 Comments on "Stock Prices Are Not What You Think They Are"

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Michael
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Been reading occasional articles by ZeroHedge about the 2bigtofails paying dividends from funds borrowed from the Feds printing press. Would like to read your take on such an issue.

Ross
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Question for former miner and current chairman of QANTAS Leigh Clifford whenever DR comes across him. In the case of “independent” Qantas director Corrine Namblard, who has resigned from the airline’s board after becoming caught up in an Italian corruption investigation, and for whom a QANTAS spokesman has said that “the QANTAS board appreciates those sentiments”….. Ms Namblard when first asked by the press if she had notified the QANTAS board of this pending case against her was quoted as saying that she had reported it to the recruitment agent that had tapped her. The question for Clifford is who… Read more »
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