A perfect contrarian indicator may now be telling us that it is getting close to the time to sell stocks.
Alan Greenspan, who began the low interest rates policy at the Federal Reserve, said this week that stocks look very cheap to him, citing a low price-to-earnings (P/E) ratio for the stock market as the key reason.
He stated that stock prices will rise, as low interest rates provide few alternatives for income investors—so buy stocks now while they’re cheap.
Of course, he forgot to mention that the rate of corporate earnings growth has been decelerating at a very rapid rate. He also forgot to mention that artificially low interest rates, which he jump-started, make P/E ratios look better than they really are.
In the third quarter of 2011, corporate earnings growth, year-over-year, was 17% for the S&P 500. In the fourth quarter of 2011, year-over-year, corporate earnings growth was only 5.5%, even though interest rates remained at historic lows.
The corporate earnings numbers for the first quarter of 2012 are not all out yet, but they point to a continuation of a decelerating corporate earnings growth trend.
In my opinion, Greenspan, while Chairman of the Federal Reserve, kept interest rates at artificially low levels for a prolonged period of time after the economy had gained some traction in 2003 and 2004. Had he raised interest rates, he would have slowed the housing market, thus helping prevent the housing market from reaching bubble levels, and then crashing.
Greenspan argues in his best-selling book that the Federal Reserve is not as independent as people believe. He notes that there is huge political pressure on the Federal Reserve to keep the economic growth engine running at a fast pace.
Does this mean he is excusing himself for keeping interest rates artificially low because he had to bend to political will?
The focus when Greenspan was in office should have been on the real economy, which, as a consequence to this “political pressure,” allowed low interest rates and lax regulation to lead to the real estate crash and what is being dubbed the “Great Recession,” which we have yet to recover from here in America.
We are all entitled to an opinion. I was never a fan of Greenspan or his initial low interest rate policies. On the other hand, I’m a big fan of current Fed Chairman Ben Bernanke. I believe Bernanke saved this country from the Great Depression Part II.
As for Greenspan, when the housing market started to fall in 2006, I still remember him saying that the housing market contraction would be confined and would not affect the remainder of the economy!
Through the years, Greenspan has become a contrarian indicator for me. Just do the opposite of what he says and you’ll do fine. And if Greenspan is saying now is a good time to buy stocks, I know it’s getting close to the time to unload stocks.
Where the Market Stands; Where it’s Headed:
We are in a long-term secular bear market. Phase I of the bear market was completed when the Dow Jones Industrial Average fell from 14,164 in October of 2007 to 6,440 in March of 2009.
Phase II of the bear market started in March of 2009 and continues today. The purpose of a Phase II bear market (often referred to as a “sucker’s rally”) is to lure investors back into the stock market under the false pretense that the economy is improving.
Phase III of the bear market, the next phase, will bring stocks back down again.
What He Said:
“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings, is a recipe for a financial catastrophe.” Michael Lombardi in PROFIT CONFIDENTIAL, September 7, 2005. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.