Tuesday, January 5, 2010

Tyler Durden and David Rosenberg on Stock Market Valuations

I'm not as big a fan of Tyler Durden and ZeroHedge as some 'net surfers are, but he has a post today where he largely quotes David Rosenberg which I felt had some insights to it. Since the main theme of this blog is finance, it's time to put a finance post up or people will think I've lost my bearings (not to mention my marbles).

In Durden's post Rosenberg seems to be saying that there isn't much substance to the very recent gains in the stock market. Rosenberg makes a case that the vast majority of recent stock market gains can be attributed to Federal Reserve monetary policy and the administration's fiscal policy and that there has been a huge transfer of wealth from taxpayer to shareholder happening in recent months. Durden seems to agree on these points and references a post he had up in April of 2009 when he said basically the same thing, only phrased differently.

Rosenberg goes on to say (I'm paraphrasing) that the world economy is on "firm footing" but he can only guess how sustainable that is. Rosenberg believes that the vast majority of 4th quarter 2009 growth came from inventory restocking. He also believes that nearly every scintilla of growth from the 3rd quarter of '09 resulted from government stimulus (direct or indirect from stimulus). And here I quote David Rosenberg word for word from Durden's post:

"The same stock market that couldn't see a recession coming in late 2007 even though it was 2 months away, doesn't see how low-quality this "recovery" is since there is nothing organic about it."

Rosenberg goes on to argue that because of this current transfer of wealth from the taxpayer to shareholders, that the stock market has actually become a lagging indicator. As Durden points out, this is pretty gutsy language, because it goes against the crowd mentality that "The market is always right". He goes on to state various numbers, mainly 2010 earnings forecasts for S&P 500 companies, which he feels are extremely unrealistic (too positive). The conclusion is that he sees the stock market prices now as generally overvalued. He states that (I'm again paraphrasing) even a small jump in monthly auto sales reported in the WSJ seem to make people overly optimistic, and the market jumps for little reason.

So the question which comes to mind after reading this is: How long can the market survive on new bond issues and computerized buy programs???

All of the things stated on this blog/site are opinions and NOT investment advice. I don't believe in market timing. I believe in selecting individual stocks with fundamental analysis. But looking at current market conditions I would say there are very few gems out there now for picking. I think it's best to try to find the very few jewels that are out there, and buy only on dips in the prices of those individual stocks that you like.