Oh great, another 'stocks will crash' column

Forget facts. It's all the rage to be a doom-monger.

By MSN Money Partner Aug 12, 2014 2:59PM
Image: Stock market © Digital Vision/SuperStockBy Jeff Reeves, MarketWatch

Anyone who follows the stock market today knows we are doomed.


Sure, the Standard & Poor's 500 Index ($INX) is up 180 percent from the March 2009 lows. And, yes, unemployment is the lowest since late 2008.


But those statistics matter only if you're looking at the facts and worried about being "objective." I mean, who's interested in what economists, government agencies and famous investors think, anyway?


What's much more compelling is when you see the latest headlines on cable news, then extrapolate a narrative based on your own observations of fear, greed and corruption. That's what we seem to have today.


As a result, I am not interested taking the word of a trendy non-profit at face value. Nor am I interested in what would have happened to a lazy buy-and-hold strategy over the past few decades.


I'm only interested in my own personal findings -- and, of course, those who share my point of view -- because that's today's trend.


And by this all-important measure, it's clear that the Dow Jones Industrial Average ($INDU) is going to crash in the very near future. The proof? So says me. That's all you need to know.


Here's why:


Earnings: Earnings, once again, have confounded investors. There is some speculation we will enjoy double-digit earnings expansion each quarter for the rest of the year, but where is that growth coming from? Sure, Chipotle's (CMG) recent earnings jumped 24 percent on a revenue gain of 28 percent, Apple's (AAPL) profits advanced 12 percent and Netflix's (NFLX) earnings doubled. 


But those fad stocks don't say much about the state of the real stock market, so it's more important to focus on the companies that are in trouble -- like Target (TGT), a barometer of consumer spending that is seeing earnings pressure now through no fault of its own and despite a solid growth strategy in Canada.


Valuation: From 1929 to 2010, the Dow Jones Industrial Average's price-to-earnings ratio averaged about 15. Now we are at a sky-high 16! Clearly, this is bubble territory. Even worse is that when you look prior to 1929, the P/E ratios for the market were even lower than 15.


Investing is the same now as it was over 100 years ago, driven by fundamentals above all, so clearly we need to account for valuations before the age of airplanes or automobiles. Some may warp statistics with kinky valuation metrics like CAPE, which show the market is more fairly valued now than during the dot-com bubble or in 2007 before the crash. But that's just fuzzy math to prove a point.


Inflation: After watching the unemployment rate drop about 380 basis points from its 2009 peak, the Federal Reserve has finally admitted that quantitative easing isn't helping at all. But the damage is already done, and Chairwoman Janet Yellen's stubborn refusal to keep rates low is bound to spark hyperinflation. 


Sure, in both May and June the rate of inflation as measured by CPI was 2.1 percent -- below the 10-year average of about 2.2 percent. However, a 2013 poll shows that Americans don’t care what government statisticians think -- they say inflation is much higher, with 39 percent saying it's over 5 percent! If you want to take the opinion of President Obama’s socialist-sounding Bureau of Labor Statistics' survey of (possibly) real Americans, be my guest.


China: China has been keeping the global economy running, whether it be through massive government spending on development or its emerging consumer class. But everyone acknowledges that a crash for China is coming, as an aging workforce prompts more stimulus to keep growth high. 


Given the interdependence of the global economy, can you imagine what would happen to U.S. stocks when investors get negative on China? Or what would happen to global growth if China saw a decline in GDP? It's hard to truly know what kind of chaos would ensue.


Wild cards: The world is a different place than it was a few years ago, what with unrest in the Middle East and an autocrat flexing his muscles in Russia. At the same time, about 1,000 people have died from the Ebola virus, and now it’s arrived in the U.S., causing a panic matched only by the outbreak of West Nile and SARS. To top it off, the U.S. is conducting air strikes in Iraq again. Who knows what terrors the news cycle will create for us next, and how a logical investor can extrapolate all manner of damage to their portfolio?


That is only the beginning, friends.


And perhaps the only reason I don't think the Dow will go all the way to zero is because of my faith in the resilience of true Americans.


If there's one thing we know best, it's sticking stubbornly to what we know works -- even when faced with daunting evidence that says otherwise.


More from MarketWatch

46Comments
Aug 12, 2014 4:23PM
avatar
Ah! An article written by "MSN Money Partner." That's like a story by "Someone from the National Enquirer."

The article's only purpose is to allow advertisements to be hung on it.



Aug 13, 2014 8:01AM
avatar
It will. at least 10% or more. Of course that is not really a crash. We can not sustain this debt and rates will have to go up. We also can not absorb all the illegal scum coming into the country. Buy bullets.
Aug 13, 2014 7:15AM
avatar

Inflation is the debasing of money via creation of fiat money.   If you double the number of dollars in circulation, you will over time double prices, if population does not increase.   NOTHING else can cause inflation, pure and simple. 


Prices on the other hand react to market forces as well as inflation.   Supply and demand can make things go up or down.  Government attempts to cover up their fiat money creation by pointing at the CPI that inflation is low.  This is totally false.  M2 say for example that we have created 72% more dollars over the last 5 years.  Adjusting for say a 4% population growth over the same period means we have created 68% more dollars chasing the same goods.


Now mind you these dollars are CONCENTRATED in the hands of banks and the super rich.  This concentration is one of the pillars of Obamanomics.  If these dollars were to reach general circulation quickly, we would have massive inflation, like under Carter. 


None the less, this is why prices are spiraling ever higher.  Demand for some items remains relatively static.  Large price increases for these reflect fiat money printing.


Aug 12, 2014 4:12PM
avatar
The Fed doesn't dump $35 billion a month into the stock market.  The Fed has never owned a share of stock in its entire history.  Its purchases are split between mortgage-backed bonds and 10-year Treasury bonds.  In fact, its balance sheet is public information for God's sake.  Besides the total market capitalization of the US stock market is about $20 trillion.  Even if the Fed was buying stocks, $35 billion/month would barely budge it.
Aug 12, 2014 9:43PM
avatar
Irony in Detroit... last week's headline was about the City shutting water services off to non-paying (bill) citizens. Yesterday, enough rain fell in Detroit to submerge it's highway systems. Some roads had 12 feet of water in their valleys. Ergo... water. The Lord moves in mysterious ways. 
Aug 12, 2014 8:27PM
avatar
"true Americans" as compared to false Americans? The stock market is essentially the economy. The economy has been the galvanic frog stimulated with two big federal reserve electrodes for several years. In the absence of stimulation. the frog is what we all understand to be true (dead). Sorry folks, we have reached the proverbial point of no return. 18 trillion in debt has it's consequences. Incidentally "18" is another phony government number. Factor in all those public employee pensions and you come up with a very large Detroit scenario. I am 3rd generation, of Italian descent but not Italian American! I am an American patriot "Thoreau" like. Good Luck..... you'll need it.
Aug 12, 2014 9:19PM
avatar
I thought easy money...  low interest rates promoted inflation?
Aug 12, 2014 6:12PM
avatar
Well at least it's not another "-----------  Warren Buffett  -------------" headline.
Aug 13, 2014 5:54AM
avatar
Well here's the problem folks, experience nor just plain observation will give anyone a true Guide to what the future will hold. Why, because we are currently in the depths of something that has NEVER been done before, ever. We have Central Bankers across the Globe printing fake Money like Crazy. That alone should cause most sane Folks concern. Then on top of that, those same Countries have massive Corporate and National Debt.

Now it doesn't take a freaking Rocket Science to figure out that you can't continually increase your DEBT levels without major consequences at some point again, and again. Most Countries are essentially buying their own Debt via QE or whatever they want to call it. Now one poster stated the FEDS aren't buying Stocks. Well here's the kicker, neither would be Corporations if interest rates were allowed to normalize. At least not nearly as much. And yes that would put a Major Ding in the Markets since the biggest buyer of Stocks, the Corporations themselves.

So all these Buy and Hold folks to Infinity can try and sell you this Long term horizon BS with total disregard to the soon to be National Debt of over $20trillion. The soon to be yearly national Deficits of a Trillion per year. Meanwhile the FED will still have a massive Balance sheet, that's only getting Bigger. So dumb and Dumber is still telling everyone that Debt and Leverage don't matter. Well it nearly brought down the House back in 2008. Since then, it's gotten 40% bigger Globally. Plus the $700Trillion dollar Counter Party Risks have grown. But sure, just disregard FACTS, eventually at you own expense.

Aug 13, 2014 12:18AM
avatar
Watch out below if the S&P breaks below 1917 next week!
Aug 13, 2014 6:58AM
avatar
Earnings-- separate market investments (gambling) from random ordinary sales to consumers and 99% of all publicly-traded stocks would be shunned for a lack of activity. 
It will be just as easy to back the QE out of the markets as it was to pump markets up with it. The value of any stock is predicated on activity. Since 99% of our business platforms are run by the same schooled egomaniac executive administrator type and not anyone familiar with enterprise, they all take a dive in the coming correction. 
The Federal Reserve needed to invest at the entry point- small business, buy failure assets and reconstitute them for the next entrepreneur. The last thing we needed was to fund salaries for Ivy League and Big Ten False Elitists. 
Aug 13, 2014 1:09PM
avatar


inflation with Obama is not true he is liar so he can keep printing money to inflate stocks of his financial supporters.Since Obama came to power oil went from$36 to 97 today beef and fish up more than 120%,houses and rents in safe neighborhoods up more than 40% produce bread up 100% all what u reall need is up air tickets up more than 150%.Thats Obama change lie lie that at the end people will believe part of lies

Aug 13, 2014 9:40AM
avatar
Nice article. I enjoyed it. yes, it's all puzzling.
Aug 12, 2014 5:40PM
avatar
Interesting article, but the author is selling something I don't buy.  I'll stay in the Market and keep reaping my profits. Tired of the experts predicting what might happen, and calling it fact. Empirical evidence is what I follow, I don't get my financial advice from Fox or MSN, or Market Watch.
Aug 12, 2014 9:35PM
avatar
"I thought easy money...  low interest rates promoted inflation?"

IF there was no QE (quantitative easing), the slack off of activity in retail and services would have caused the market price of the good or service to rise so fewer sales would cover the same wages and.or overhead. BECAUSE there is QE, the fake printed money has diluted the currency and since it never leaves the markets, causes the price of goods or services to seem like they cost more to us. The condition is being labeled- secular stagnation because there can be no economic recovery without far fewer wealthy people and a whole lot more working people making family-sustaining economy-creating progress. 
Low rates benefit no one. They allow under-qualified and risky borrowers to get credit, they allow wealth to sit on assets and live on credit, they don't create enough margin to service credit portfolios, they reduce the value and integrity of common assets because too many are bought almost entirely on credit.
Aug 13, 2014 6:52AM
avatar
"Valuation: From 1929 to 2010, the Dow Jones Industrial Average's price-to-earnings ratio averaged about 15. Now we are at a sky-high 16! Clearly, this is bubble territory. Even worse is that when you look prior to 1929, the P/E ratios for the market were even lower than 15."
$$$
ALL assets are lacking stable valuation. Housing, gold, bonds, stocks, commodities, all have too many speculators and not enough ordinary exchange to establish a solid value mark. An average well-maintained home is likely to dip and recover the fastest. Every overloaded over-inflated bastion will not. Imagine the glut of rental homes in America today. The same fool likely is holding rentals, gold, guns and a pickled perspective of Reality. Flat out, life for them will end before values recover on their holdings. The object was to invest QE in cash flow, not spend it in the financial sector's rigged casino. You LOSE. 
Aug 13, 2014 5:42AM
avatar
em·pir·i·cal
adjective \im-ˈpir-i-kəl\

: based on testing or experience

Full Definition of EMPIRICAL
1
:  originating in or based on observation or experience <empirical data>
2
:  relying on experience or observation alone often without due regard for system and theory <an empirical basis for the theory>
3
:  capable of being or disproved by observation or experiment <empirical laws>
Aug 12, 2014 9:20PM
avatar
Extrapolate is word you need to watch out for. When the so called market experts start using this word often it only means one of two things. The market may choose to go up or it may choose to go down. Once it makes its decision the extrapolating begins.
Aug 12, 2014 9:17PM
avatar
Mind boggling. Bloggers prove mind control over writers. 

Jeff, I'm going to count to 3. When you hear 3 you will be a chicken... 1, 2, 3
Aug 12, 2014 8:51PM
avatar
The Fed's plan from the start was to build a massive Balance Sheet so that they could give the illusion that QE stopped once their buying program ended. Problem, it won't have ended. They will continue to turnover what's on the balance sheet. The balance sheet has to shrink before we talk about how it does or doesn't matter. That is unless other events like the massive Global Debt Bubbles take hold first.

Now I like the style of this article, nice touch at the end. However, this article as most others have failed to mention this massive Global Debt Bubble nor the massive over $700Trillion in Derivative Counter Party Risks. Debt and Leverage was as the forefront and caused the Great Recession. The same will be the case this time around.

I have faith in the advancement of technology. However I have very little faith in the humans to use it properly. We are literally in the Worst of times and the Best of Times. Which way it will go, nobody knows for sure. One thing is for sure, the working class better get a clue and fast.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

120
120 rated 1
268
268 rated 2
439
439 rated 3
709
709 rated 4
641
641 rated 5
609
609 rated 6
640
640 rated 7
516
516 rated 8
272
272 rated 9
152
152 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
EXCEXELON CORPORATION10
TAT&T Inc9
VZVERIZON COMMUNICATIONS8
CTLCENTURYLINK Inc8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.