Don’t Make the Same Mistake Other Stock Investors Are

By: InvestmentContrarian

Sasha Cekerevac wries: One of the most common problems new investors face is learning that at certain points in an economic cycle, bad news can be seen as good news.

The recent speech by the Federal Reserve chairman Ben Bernanke regarding monetary policy was seen as bullish for investor sentiment, even though he indicated that because the economic recovery in the U.S. is still stagnant, his current monetary policy would need to remain in effect for a longer period of time until the economic recovery gained momentum.

One would think that a slower economic recovery would be negative for investor sentiment, but that’s not always the case. There is a point at which it can reverse, when investor sentiment becomes so bullish and fueled by what many perceive as a liquidity boost from the Federal Reserve that they ignore the real world.

I’ve said before that I believe a large part of the boost in investor sentiment has been due not to data showing an economic recovery, but to the belief that monetary policy liquidity will move into the markets in absence of an economic recovery.

A perfect example of why I believe that has been the market reaction was after the last Federal Reserve meeting in which it discussed when to begin reducing its asset-purchase program—investor sentiment quickly shifted into negative territory as stocks fell.

On the surface, a reduction in asset purchases by the Federal Reserve should be a positive sign since that would mean, by definition, that the economic recovery in the U.S. is accelerating.

But investor sentiment did not act in that manner, so one must conclude that many investors are simply using liquidity as an excuse to buy stocks and not base their decisions on fundamentals.

Therefore, the question one needs to ask is: is the economic recovery accelerating?

There are many mixed messages, but we are seeing an increasing number of variables point to an overly optimistic level of investor sentiment, considering the current level of economic recovery.

As an example, United Parcel Service, Inc. (NYSE/UPS) recently came out with a warning lowering its guidance for earnings per share for the second quarter. From a previous guidance level of $4.80 to $5.06, the company issued a new guidance level for fiscal 2013 of $4.65 to $4.85. (Source: “UPS announces second quarter expect the results,” United Parcel Service Inc. web site, July 12, 2013.)

While some portion of the lowered earnings guidance is company-specific, such as its labor relation problems that have lowered package volumes, the company also explicitly cites a slowing industrial economy in America.

It is true that United Parcel Service (UPS) is only one company, and the nation certainly is much more complicated and diverse than any one data point; but considering where investor sentiment is on the market currently, indicators from companies such as UPS certainly should raise some doubt about the strength of America’s economic recovery.

When making an investment decision, everything is about risk and reward. When you buy a share of a company, are you buying at a discount, at a premium, or at a fair value?

Considering the level of investor sentiment in relation to the economic recovery, I believe that the market is skewed upward, in large part due to investors having a false sense of confidence that the Federal Reserve will continue its current monetary policy forever.

A few weeks ago, we witnessed a sell-off in both bonds and stocks as the result of just some talk about a possible reduction in the asset-purchase program. There was no policy shift, and it was not a discussion of increasing interest rates.

If investor sentiment is that fragile, to me it indicates that people are not evaluating the fundamentals and the conditions behind an economic recovery, but are simply buying stocks because the Federal Reserve has its foot on the accelerator.

As I’ve mentioned before, investor sentiment will shift once the Federal Reserve begins its adjustment in monetary policy. Watch for that change to occur, and alter your portfolio accordingly.

This article Don’t Make the Same Mistake Other Investors Are
was originally published at Investment Contrarians

By Sasha Cekerevac, BA
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

About Author: Sasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. See Sasha Cekerevac Article Archives

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