Stock Expert Kee: The Dow 'Has No Business' at Lofty Levels

Friday, 29 Nov 2013 10:12 AM

By Michael Kling

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The Dow is outrageously overvalued, says Thomas H. Kee Jr., president and CEO of Stock Traders Daily and founder of The Investment Rate.

Earnings and revenue simply don't support the Dow's 22 percent increase this year, he maintains in an article for CNBC.

The Dow's earnings per share growth averaged 2.61 percent for the first three quarters of 2013.

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Revenue growth averaged negative 0.73 percent, including negative 1.68 percent and 1.3 percent in the first and second quarters respectively. It was only in positive territory for the third quarter when it was 0.8 percent, Kee points out.

"The Dow Jones Industrial Average based on its growth rate has no business at these levels."

The new membership of the Dow, which technically will not be applied until this quarter, improves its performance. Excluding Alcoa, Bank of America and Hewlett-Packard and including Goldman Sachs, Nike and Visa makes the index's performance appear better.

The Federal Reserve's asset-buying stimulus has a huge impact on stock prices, he warns.

"If you are buying the Dow Jones industrial average, make sure you know what you're doing because when the music stops, when changes to policy actually become a drain on liquidity, you do not want to be left without a chair."

The Fed's Federal Open Market Committee (FOMC) has little leeway before tapering its quantitative easing starts to drain liquidity from the economy, he says, arguing that although the Fed is buying $85 billion of bonds a month, the real net stimulus is much less.

"That means the combined efforts of the U.S. Treasury and monetary-policy decisions of the FOMC will become a drain well before the $85 billion dwindles to zero."

And when that happens, stock values will be based on fundamentals instead of the stimulus.
Despite robust gains, technical indicators indicate that stock market still has room to run before becoming overvalued, say Mary Anne and Pamela Aden, analysts and editors of The Aden Forecast newsletter.

Most importantly, the Fed shows no sign if ending its stimulus any time soon, they write in an article for MarketWatch.

Janet Yellen, the likely incoming Fed chairman, will surely continue the central bank's easy money policies, they predict.

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