“The Market Says…” Is A Non Sequitur!

“Davidson” submits:

“The market says…” is a non sequitur!

In my 30yrs of experience there is no broadly useful investment information that can be gleaned from watching the daily wiggles of the stock and commodity markets. Yet, the belief (I should say the myth) remains that market action is the best source for future investment guidance. In fact, the bulk of investment decisions which drive market prices come from the knowledge of current events some of which are simply not apprehended by those who believe in the concept of “The Efficient Market”. Those who seek investment successes in the short term (traders and Hedge Funds) completely miss the opportunities available to the longer term investor (Business Cycle Value Investor).

Market movements over longer periods, 2yr+, have clear economic drivers that are relatively easy to track in my opinion AND one can with a little effort actually anticipate larger market moves for investment purposes using the information readily available on the Dallas Federal Reserve and St Louis Federal Reserve sites among others.

Many believe that great wealth is created by investing through the stock markets (this is another myth). This is rarely the case. Most great wealth has been initially created by entrepreneurs when they created a gadget or service that was of great value to others. Great wealth is created buy inventing something that others strongly desire and that can only be acquired by buying it from the entrepreneur.

The investment markets should be thought of as an enhanced savings device without FDIC insurance. One should study it, make thoughtful decisions regarding Return vs. Risk and avoid mimicking the highly impulsive traders one sees so often portrayed as successful investment models. I wonder why if they are so successful and have such great ideas do they have time to be seen presenting these ideas on broadcast media? Hmmm…!

When the media hosts individuals who couch their forecasts using the term, “The market says…” one should immediately discount anything the individual says. What the market did yesterday or this morning has no investment impact to what is going to occur tomorrow or next week. What matters most in the long term view are 1) What are the SP500 Mean Earnings?, 2) What is the market’s Prevailing Rate? and 3) What is the current stage of the business cycle?

The Dallas Fed recently released its Feb 2011 12mo Trimmed Mean PCE which was also updated with minor changes for the past 2yrs.

The reading of 0.9% for 12mo inflation leaves the SP500 by this measure deeply undervalued. The SP500’s Mean Earnings capitalized by the Prevailing Rate have a price of 1718 vs. this morning’s price of 1307.

The recent manic-panic media predictions of a market top and imminent collapse have no historical support with the superb economic trends currently in place.

I remain more than a little optimistic and urge investors to take advantage of what I consider a temporary dip in market psychology.