Are Tapering Fears Overdone?

10/06/2013 6:00 am EST

Focus: STOCKS

Michael Khouw

Partner, The Options Edge

Concerns over future Fed action are causing some turmoil in the market and DASH Financial's Michael Khouw discusses what he sees as the longer-term implications.

SPEAKER 1:  My guest today is Mike Khow.  Hi Mike and thanks for joining me.

MICHAEL:  Thanks for having me.

SPEAKER 1:  You know we’ve had a really good run in the market and some people are saying that the whole idea of tapering is what recently brought the market down 225 points in one day.  Everyone thinks oh my gosh, 225 points, but in reality, percentage wise, it really isn’t that bad.  I mean, where do we go from here?  I mean, do you think this tapering concept has kind of been hovering over us as a black cloud for the last few months?  Do you think that’s going to keep investors out of the market now?

MICHAEL:  Well, I think it’s definitely a cause for concern; not just among individual investors, but institutional investors.  Think about this; QE was the biggest justification for some of the largest bowls in the market over the course of the last couple of years.  I’m talking about guys like David Tepper and other who said that it was foolish to think that the market could do anything but go up, all right.  A lot of people think of QE as printing money, okay, and while there is an element of truth to that concept, what we really have to understand is that the reason the Fed was doing this was when the credit bubble collapsed, essentially, the money supply decreased because there was a huge amount of non-inter financial lending that was built into it, and the way to think about that, there’s a multiplier effect.

SPEAKER 1:  Right.

MICHAEL:  You make a dollar, you put it in the bank; $.80 gets lent out, and so on.  When a lot of that lending money comes out of the marketplace, that’s deflationary, and that’s what they were trying to avoid.  When we talk about tapering now, what are we really talking about?  Are we talking about something contractionary like that bubble coming out.  That isn’t really what we’re talking about.  What we’re talking about is are we going to continue to try to reflate what was lost?  Once we’ve done that, there’s not really a need to continue to do it, so provided that we don’t start seeing contractionary action from the Fed, some form of tightening, I don’t really think we have to be as concerned about it, I think, as people are.  What we’re going to do is we’re going to reestablish a more normal market condition, so while I think obviously you don't have that free put that the Fed provides when they’re just throwing all that stimulus things – basically, passive financial assets really have nowhere to go but up in that environment.

You lose that, but that doesn’t necessarily mean everything is going to go down now.  Now, what you do is you say, you know what, we’re back to a more normal set of circumstances, let’s just go about our normal investment process, and try to make smart decisions.  The market, on a long-term fundamental basis – S&P trading 16 times earnings, 15-1/2 times earnings, that’s only a shade over a long-term historical average, so it’s not like we can say the market’s 20% or 30% over value, all of that is supported by Fed action.  Quite the contrary.  It’s at about a fair valuation.  There are still some values in the market, mostly in the cyclical names, and there’s a couple areas that have been a little bit inflated, and some of that is caused by this concern.  People buy staples and dividend stock because they’re afraid of what’s going to happen in the marketplace, so those are areas that are probably going to get pressured a little bit, but overall, I don’t think the markets in a lot of danger here.

SPEAKER 1:  Thank you.

MICHAEL:  Sure.

SPEAKER 1:  And thanks for joining as at the MoneyShow.com Video Network.

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