Dow Sets Record, Everything Else is Contained

By Tom Luongo in Shares and Markets | March 5, 2013 23:17 | Tags: , , , , ,

When Alan Greenspan was brought out of his coffin — only at night by the way — a couple of weeks ago he made it clear that the Federal Reserve believes it can create economic prosperity through the manipulation of perception.  And the greatest tool for attenuating the strength of the Fed’sreality distortion fieldis the U.S. equity markets.  So, how great everyone must feel today since the Dow Jones Industrial Average set an all-time high and the S&P 500 is right behind it.

In the process everything else has been tamped down into very tight trading ranges: gold, silver, the Euro, oil prices, copper, natural gas, etc. All of these things are range bound for one reason or another, most of which have again to do with the management of expectations and a liberal use of money flow.

One of the adages of the market is that the Fed can print the money but it cannot control where it goes, well, with the current rate rigging schemes at the short and long end of the U.S. Treasury yield curve I would say that that adage is no longer quite accurate.  With the current situation we are witnessing a perfect set up to drive money into stocks without regard for the fundamentals.

With earnings growth forecasts looking quite anemic — especially if one backs out both Google and Apple — and the Schiller P/E ratio for the S&P already trading at an inflation adjusted 23.72 today, one should be careful in the current environment.  There is a growing disconnect between stock prices and the fundamentals for them.  So, either inflation will begin to take hold across the board or the crash is just around the corner.

About Tom Luongo
Tom is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.

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