Stock Prices Are Not What You Think They Are

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 Markets and Money, 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’.

Greg Canavan
for Markets and Money

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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 is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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Markets & Money