- September 18, 2013
The stock market continues to set records. Highly priced in terms of average values, the market gets more expensive every month. This is a bull market.
So far, no technical reasons indicate the bull market will not continue, but a host of reasons give investors pause:
1. A time-honored method of evaluating fairness of stock prices is a company’s payment of dividends to stockholders, or what is known as the cash dividend yield. The Dow Jones Industrial Average is 16,500 points, and the dividend yield is 2.2%. Based on historical dividend yields of 4.2%, the market would be at 8,600 points — a clear indication the market is overpriced.
2. A full-time private sector workforce of 86 million sustains benefits for 109 million welfare recipients, who pay nothing into the system. Factor in 17 million government workers and the financial burden upon those 86 million workers becomes onerous.
3. Congressional and Senate tax committees have discussed taxing the huge pools of cash available on corporate balance sheets. That would curtail dividend increases. Cash currently available for expansion would be used for taxes. Taxing these assets creates the potential for a market sell-off.
4. We experienced 7 million foreclosures the last few years. Nine million homeowners live in houses less valuable than what they owe on them. Millions more live in homes with no equity, just covering mortgage costs. There has been no wage growth in the last several years. The average family makes just under $50,000, down from almost $54,000 annually five years ago. Former Federal Reserve Chairman Alan Greenspan forced interest rates from 6.5% in 2000 to 1% by 2003. According to the Mortgage Bankers Association, an increase of mortgage rates to average levels could spur millions of additional foreclosures and re-create the mortgage mess of a few years ago.
5. Prolific economic author Peter Schiff frequently writes about the “phony economy that is completely dependent on the ability to borrow money we cannot pay back. We must borrow just to pay interest on government debt.”
He continues: “A collapse of the dollar or a huge spike in interest rates will cause our unemployment to skyrocket. Credit will dry up, and the dollar will collapse, completely wiping out all savings, and sending consumer prices into the stratosphere.”
We are already witnessing the slow collapse of the dollar in international markets, along with deterioration of the dollar’s purchasing power through inflation.
6. The effects of the Dodd-Frank Act have been devastating. Average compensation at the Federal Deposit Insurance Corp., which regulates banks, now exceeds $190,000 annually, more than the average salary of the fat-cat bankers they regulate. The cumulative number of hours spent on regulatory paperwork in 2013 was 10.4 billion hours, according to the American Action Forum. Increased costs from government regulation make our products more expensive and less competitive in world markets.
7. High-frequency trading (HFT) continues to make income for Wall Street trading houses while hiding the real commission costs from the public. The public pays at least $32 billion in stock and bond commissions they are currently unaware of, as Michael Lewis depicts in his new book, “Flash Boys.” A big falling out over these schemes could negatively affect the public’s trust of markets and the banks involved.
8. We believe that Republicans and Democrats have differences, yet they continue to do the same things. Here are some interesting numbers:
Debt ceiling increases since 1960
Republicans in power 49
Democrats in power 29
The Republican Party is known for its attempts to cut spending. But Republicans have allowed the vehicle for bigger government and more spending — debt ceiling increases — nearly 70% more often than Democrats. Both parties love the power, perks and financial benefits of big government. They will not reduce its size. That means continuous increases in debt will follow, which will harm the market because the economy can’t absorb additional debt loads.
9. The Fed supports this market by manufacturing at least $1 trillion annually out of nowhere to make welfare payments. A reduction in this quantitative easing will direct funds away from the market. Fewer funds means less demand, which could reduce stock market values.
It is hard to see how the market will continue to grow. It is difficult to rationalize the market being at these levels. Logic dictates our markets are not only fully priced — but overpriced. Further additions to our stock and bond portfolios may subject prudent investors to more risk than they need to acquire.
2012 Census Bureau Statistics
Full-time workers ............................ 103,087,000
Less government employees* .......16,606,000
Private-sector employees ...............86,481,000
Number receiving monthly benefit checks ........151,014,000
Paid-in recipients**................................................. 42 million
Hard welfare recipients*** ...................................109,014,000
*12,597,000 state and local employees; 4,009,000 federal employees; **Social Security, veteran, unemployment, etc.; ***Food stamps, government housing, Medicaid and other means-tested programs
George Rauch, Longboat Key, is chief executive officer of Bradenton-based General Propeller and a former Wall Street investment banker.