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The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

Market Sentiment At Its Lowest In 10 Months

Market Sentiment At Its Lowest In 10 Months

Stocks sold off last week…

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SARS - Latest Topic to Impact Market

Is SARS going to impact the stock market? Most media outlets love this topic because it grabs immediate attention. Of course you are not going to find any help from the media if you are trying to figure out which way the market is going to move, regardless of the topic. SARS is not going to impact the overall market, but it may negatively hit some technology companies.

Beijing, one of the largest cities in the world, has been essentially shut down. People are not shopping and business is not getting done. American based technology companies have been very dependent on China for growth lately. This shutdown is going to slow down their business. This lack of demand in China will lead to a slight buildup in inventory, which will cause price decreases in other markets. Some of those price cuts will show up in the United States. Our markets will not show much more effect than that because we are slowly suffering from a deflationary cycle. Over the next few years we will see many reasons that will contribute to falling prices. If not SARS, then something else.

Last week, I talked about a pattern from corporate insiders which shows how unwilling they are to own their own stocks. Something similar popped up last week that is worth mentioning. Corning, the manufacturer of fiber optics, conducted a secondary offering of 50 million shares. A secondary offering is when a company sells additional shares on the open market, and pockets the cash. Corning stated that they are using the proceeds to pay down debt. The 50 million shares represents about 20% of the previous shares outstanding. This is disturbing for two reasons. First, Corning's stock has done well in the last few months, but it is still trading 90% below the all time high. As soon as the stock crossed five dollars a share, the company quickly unloaded a huge amount to the public. If the company is so willing to sell so much stock, should you be willing to own it? The second concern is with interest rates so low now, why be in a hurry to pay back debt? Why not lock in these rates for a longer period of time? Understand that stockholders are much more demanding on their rates of return than are bondholders. It seems to me like a little more of the famous three card monty, and if you see more of these types of deals, watch out!

The market is currently putting the finishing touches on the rally that began in early March. This is not, I repeat, not a new bull market. It is a bear market rally. It is the stuff of professionals and gamblers. The public still has not demonstrated any level of bearishness since the mania topped three years ago. The market cannot truly turn until this happens. Also, the dividend yield on the S&P 500 is 1.75% and the PE ratio is about 34. These numbers need to improve dramatically before people should place long-term dollars in the market. Cash is still king!

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