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ZeroHedge: Killing The ‘Stocks Are Cheap’ Myth Once And For All

Wednesday, August 15, 2012 9:32
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(Before It's News)

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Each and every day we hear, stocks are cheap – P/Es are low, money-on-the-sidelines, sentiment is contrarian-wise weak, ‘it’s an election year’, and many other anecdotal BTFD-driving broker-based sound-bites. The truth will perhaps set you free. On both a valuation (trailing P/E and market-cap/GDP) basis and cyclical (long-term sideways trends, percentage holdings of stocks, historical election/decennial patterns, coincident-to-lagging indicators, and financials leading) basis, the fact is – the only drivers of bullish reasoning here is recent momentum, an implicit ‘rationality/Bernanke put’, and an implicit bias towards self-sustaining behavior by an entirely-dependent marketplace of professional commission-takers.

Valuation Insight:

On a trailing P/E basis, we are anything but cheap. In fact over the past 90 years we are almost perfectly ‘average’ and have not seen the re-emergence of secular bull markets until this trailing (hope-less) data drops notably further…

The stock market’s value (market-cap) is well above its 70-year average relative to US GDP. At 2-sigma over its long-term average, stocks appear anything but cheap…

as the ponzi-like demand for stocks – by every fast-money hopeful investor/trader – maintains a status quo that remains notably away from long-term risk aversion realities.

Cylical Insight

On a long-term cycle basis, we have a few more sideways years (at best) before expectations of a ‘secular bull’ can have any credence…

as the typical sideways range-bound market has last 15-25 years, and we are well ahead of historical trend as we keep hoping that this breakout will be different…

and we are also well ahead of all the usually-cited cycles – election, seasonal, decennial – as hope remains efusive…

and fundamentally the leading-to-coincident indicator – which has tended to historically peak with stocks over the last 50 years – has rolled over quite notably divergent from stocks…

and the typical leaders of any secular rally – the financials – will be under more pressure as the Fed maintains ZIRP and the hope of more QE keeps the curve flat; making financials a headwind rather than a tail-wind for a broad market rally…

The bottom-line is that buying stocks here is a hope strategy – as it always is really and we have seen these kind of hopeful situations twice before in the last 10-15 years. As someone once said, fool me once, shame on you; fool me twice, shame on me; fool me thrice, shame on Bernanke.

Charts: BofAML

via zerohedge



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