Bubble Market? I'm Calling BullSh*t.

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Oct 18, 2014

Ignore the Ratings Whores

We are not in a stock market bubble.

Media hosts love guests espousing extreme views. They are much more interesting than money mangers that speak of 'normalcy' and, best of all, they garner better ratings.

Understanding that simple truth will help you to ignore fear mongering and allow keeping your sanity in a sea of sensationalism.

The extreme volatility of the week just completed really brought out the big guns from the bearish camp. Monday saw a 223 point decline in the DJIA. Wednesday’s worst moment was 460 points below the previous day’s close.

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When the dust settled, though, the Industrial average was off by just over 1% on the week. That is the equivilent of a $10 stock dropping by less than 10-cents, over a five-day period.

Saying that on the air wouldn’t goose Neilson ratings.

October 19th marks the 27th anniversary of 1987’s historic stock market crash. Are we really at 'Bubble Valuations' and ready for an updated version of the 1987 debacle or even a March 2000-type sell-off?

The facts unequivocally say NO.

The Standard & Poors 500 is commonly used as a proxy for the broad large-cap equity universe. As of Oct. 17, 2104, its forward looking P/E was a very ordinary 14.6x next year’s estimate. That was nowhere close to the absurd overvaluation present at the peak of the internet/tech bubble period.

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The present reading appears even more reasonable when taking the Fed’s ZIRP (zero interest rate policy) into account. In the early 1980’s 10-yr. Treasury Bonds offered real competition for investor dollars at up to 15% coupon rates. Just prior to the 1987 crash 10-yr. US government bonds were still paying just above 7%.

Today’s 2.22% rate on the 10-yr notes means P/E ratios should be much higher than average due to the lack of good alternatives to stocks. Adjusted for ZIRP... equities actually look cheap.

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Those who made a case for selling stocks had more credibility back in July or during mid-September. After last week’s action the DJIA was slightly negative for 2014 YTD, taking it back to a level seen in late 2013. Corporate earnings and dividends have risen nicely since then while the average stock has marked time.

That basically static index reading thus masks a lot of value creation. There is no evidence of a ‘bubbly’ excess in the DJIA.

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Calculating theoretical valuations are a good exercise. Watching what company insiders are doing with their own real money investments also lends evidence that any recent excesses have been worked off.

Who knows the true worth of a company’s shares better than its officers and directors? The Thomson Reuters Insider Sell/Buy ratio has been an excellent short-term (weeks to months) indicator.

Unlike Mom and Pop, in-the-know investors like to buy bargains. They aren’t scared away by low prices. Compare the readings of this wonderful signal with market action of the previous 12-months to see just how accurate it has been.

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Insiders turned bearish in mid-September. They accelerated their stock sales as the indices peaked. Last week’s pullback led them back into slightly bullish territory.

Knowing the market is not pricey will insulate you from the hype you hear on the news or are exposed to daily on CNBC.

Stocks might go up, or down, in the very short run. They remain your best chance at long-term prosperity in a world with artificially low interest rates and apparently unlimited money printing from the world’s major central banks.