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Inflation Expectation Tuesday: Money Managers Have An Inflated Sense of the Future… So Buckle Up!

Courtesy of Phoenix Capital Research

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Barron’s recently unveiled the results of its latest “Big Money Poll” on November 1.

Boy was it a doozy.

 

According to the magazine, 60% of money managers are bullish on the stock market’s performance through June 2011. All in all, the bulls expect the market to rally 6% over the next seven months.

The reasons given for this bullishness ranged from delusion (“Stocks are cheap based on historical price-to-earnings ratios,”) to the outright insane (“I see no justification for a double dip.”) Altogether, 53% of money managers think stocks are UNDER-valued.

The problem with the “stocks are cheap” argument is that it’s based on the S&P 500’s P/E ratio of 17. Now that’s not a bad number except for the fact that Financials account for 15% of the S&P 500 index (second only behind Tech at 19%) and anyone who claims that they know what the REAL earnings are at financial companies is flat out lying.

When a sector throws every and all accounting rules out the window and is allowed to value itself at whatever it likes, there is no end to the gimmickry that can be used to craft great earnings (such as claiming profits based on the fact that bond prices have fallen and the company could allegedly buy them back at a profit).

So that’s 15% of the S&P 500’s P/E that is flat out fictional if not fraudulent. As for the claims that there’s “no justification for a double dip,” well, technically it’s correct given that we never actually had a REAL recovery, so the ongoing collapse isn’t really a double dip.

After all, let’s not forget that the “stocks are cheap” crowd are the same folks who bet big on stocks going into 2008. Indeed, back in late 2007/ early 2008, Barron’s surveyed 12 Wall Street strategists. Every one of them forecast that stocks would head higher in 2008. The forecasts ranged from an increase of 3% to 18%, with the group’s average forecast at 10%.

That forecast turned out great. The market dived over 30%.

So why are money managers so bullish through June 2011? The date, of course, is not random: June 2011 is when the Fed’s QE 2 program is scheduled to end. Since QE has done nothing but ramp stocks for over 18 months, it’s not surprising that money managers assume more QE equals higher stock prices.

Or does it?

In point of fact, betting that the Fed can keep stocks elevated forever is moronic. The Fed has been pumping the market to the tune of $9-10 billion PER WEEK ever since QE 2 was announced and the market has already dropped some 3%.

Indeed, it’s not getting to the point where we can have TWO POMOs in one day and still barely close in the green (see yesterday’s action). Seriously, at one point do investors start to wake up and realize the Fed has solved nothing with its policies and in point of fact has made the financial system even MORE dangerous.

The whole world is realizing this in slow motion, Europe is imploding, China is desperately trying to cool inflation, and the US DE-pression is about to fall off a cliff as millions of its citizenry lose their unemployment benefits and become derelict.

And somehow the S&P 500 will rally 6% from this? Give me a break.

Good Investing!

Graham Summers

PS. If you’re getting worried about the future of the stock market and have yet to take steps to prepare for the Second Round of the Financial Crisis… I highly suggest you download my FREE Special Report specifying exactly how to prepare for what’s to come.

I call it The Financial Crisis “Round Two” Survival Kit. And its 17 pages contain a wealth of information about portfolio protection, which investments to own and how to take out Catastrophe Insurance on the stock market (this “insurance” paid out triple digit gains in the Autumn of 2008).

Again, this is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com and click on FREE REPORTS.

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