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11/17/2014

Well the long awaited correction in US stocks came and went a couple of weeks ago, and if you blinked, went to the bathroom or cut the grass….you probably missed it, as the major indexes are now at historic highs. We mention this interesting topic to once again emphasize the unnatural state of the affairs in the US equity markets….a major issue of which involves the lack of any healthy value generation in prices that takes place in more normal corrective patterns (ones which transpire over several weeks).

We hate to play the ever broken record of the idea that US equities have been targeted as a stimulative tool to help grow the economy, but it’s necessary. This topic is particularly interesting when comparing the situation to the Japanese economy and the volatility and odd state of affairs that transpired in its equity market years ago.  The once seemingly mighty Japanese economy, the envy of other industrialized economies around the globe back in the 1980s, has posted sputtering growth, repeated recessions, a lost generation to underemployment, and zero interest rate monetary policy.   In fact as we write this report, you’ll never guess, Japan has slipped back into recession once again.

This point is noteworthy to mention at this time because, despite a seemingly unstoppable US Equity market and increased hype about a strengthening economy…interest rates remain at the zero level, which is a sign that something remains wrong with financial asset valuations.  One may quickly assert that the QE program was discontinued, however oddly enough, market interest rates have not moved to reflect any confidence in this (e.g. the treasury curve has about the same shape now as before the announcement).

The bottom line you say?  Same old, same old….don’t fight the tape in US Stocks and don’t get excited about a fixed income move until you see some sustained price activity that tells you something is changing.  A couple of new issues to consider….Chinese bad debt is on the rise and as we mentioned…Japan is sputtering again.  We won’t even mention Europe.  We’ll keep you in the loop in case you decide to rake your leaves !!

 

Stephan Kudyba (MBA, PhD)                      THE MARKET DOCTOR

 

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