El-Erian: Stocks ‘Artificially High’; Time to Take Some Profits

Sunday, 17 Feb 2013 06:18 PM

By Dan Weil

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The recent surge of equity prices to a five-year high isn’t justified by fundamentals, says Mohamed El-Erian, CEO of Pimco.

Rather, the move has been fueled by the Federal Reserve’s massive easing, which has injected more than $2 trillion of liquidity into the financial system during the past five years, he tells Yahoo.

“We think that [stock] prices are artificially high, that maintaining them here is going to be hard as central banks become less effective, and that it’s time to book some profits and to wait for some better entry points.”

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

El-Erian isn’t looking for a stock-market blowout like in 2008-09, when the Standard & Poor’s 500 Index plunged 45 percent.

But “prices that have gotten way ahead of what policy can deliver," he says.

He has mixed views of the easing strategy adopted by central banks around the world. On one hand, the central bank accommodation is necessitated by the failure of fiscal policy, he says. But on the other hand, it can lead to currency wars.

This may be “a race to the bottom,” El-Erian says. But, “it can also work” by boosting wealth and inspiring economic risk-taking.

David Sterman, senior market analyst at StreetAuthority.com, sees the stock market much like El-Erian.

“All of the stuff that was done [by the Fed] with the quantitative easing programs has injected so much into all kinds of assets, including stocks,” he tells Newsmax TV.

“So what you’re seeing here at Dow 14,000 is not a reflection of the U.S. economy; it’s just a reflection of the money flows that tend to push the market higher.” The Dow Jones Industrial Average closed Friday just under 13,982.

But when the Fed tightens its spigots, the story will change, Sterman says. “Then there’s no more fuel, and that’s why there are a number of people who think that the market is making its high for the year right now.”

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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