This column originally appeared on Real Money Pro at 8:37 a.m. EDT on Oct. 15.
NEW YORK (Real Money) --
"Logical consequences are the scarecrows of fools and the beacons of wise men."I remain cautious and plan to stay conservatively positioned over the near term. While I recognize that being right about the direction of markets and being logical and sound of analysis may not always be a perfect marriage, today we face an unhealthy combination of a widening disconnect between elevated market valuations and current and prospective weakening fundamentals.
-- Aldous Huxley
Over the last few months, central bankers have reinflated the wedge that separates weak fundamentals from high market prices. Whether it is the Fed's open-ended QE3 and extended forward interest rate guidance, or the European Central Bank's unlimited securities purchase program, robust asset markets are an integral part of policy attempts to counter tail risks and deliver economic growth and jobs. By artificially inflating asset prices above levels justified by sluggish fundamentals, these two central banks hope to calm market concerns, ignite animal spirits and trigger the wealth effect. And their actions are contagious.... [I]nvestors should not get too carried away. There is a limit to how far and how long prices can deviate from fundamentals. This is particularly the case when central banks, acting without the support of other government entities, do not have sufficiently-refined tools to secure good and sustainable economic outcomes.... [I]nvestors' romance with the "central bank put" should not be unconditional or everlasting.... Central banks should be respected. And they can certainly counter air pockets, but not forever. -- Mohamed El-Erian, CNBC.com columnAs relayed in the above comments by El-Erian, at its core, the bullish view is based on a Soma-induced lunar eternity in which investors worship at the altar (and effectiveness) of more easing and the ever easy money provided by central bankers coupled with the downside protection afforded by a global monetary easing put. While the potential exists for resolution of the many issues highlighted in this column by early 2013, risk (particularly relative to reward) has been unusually heightened over the near term and through the balance of 2012.
O, wonder!Similar to the character of the ultimate outsider, "John" in Huxley's seminal work, Brave New World, I am finding it hard to fit in with the generally optimistic and bullish World State these days.
How many goodly creatures are there here!
How beauteous mankind is! O brave new world,
That has such people in't! -- William Shakespeare, The Tempest
"'A gramme is better than a damn,' said Lenina mechanically from behind her hands. 'I wish I had my soma!'" -- Aldous Huxley, Brave New WorldInvestors face the risk of a non-Soma reality in the months ahead. Recent indicators of business confidence highlight that the policies of our leaders (in both parties) in Washington, D.C., are inhibiting employment growth. In turn, the domestic economic recovery remains subpar. This has produced a serious challenge to corporate profit growth in this year's second half and potentially for 2013. Until recently, market participants have been looking through the global economic and earnings lethargy and have relied on the global monetary policy put to give fuel to the upside and to provide investors with the confidence that the downside was protected. During the last few weeks, however, the market's uptrend has appeared to reverse, and the S&P 500 now threatens to break previous support levels.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV