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TMFAleph1 (96.14)

Don't Buy Stocks for the Wrong Reason

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September 27, 2010 – Comments (5) | RELATED TICKERS: AAPL , GOOGL , MO

Debunking the Fed model. I welcome all informed/ civil feedback.

Alex Dumortier

5 Comments – Post Your Own

#1) On September 27, 2010 at 2:12 PM, MikeMark (29.86) wrote:

I feel like just saying:

Duh.

But you asked for informed comment. So:

Any models that come out of the Fed are suspect. First, who in their right mind would rely on something cooked up by those who couldn't see the housing bubble and don't see a bond bubble, especially when knowing these things is a part of the Fed's supposed expertise.

Second, the best reason to own stocks is to attain diversified growth in a complete portfolio. Most people don't look at what's happening to money itself and recognize that it is a part of their portfolio. The US $ (supposedly maintained by the Fed) has a long term inflation rate of about 3%. The Fed destroys the money to create their own income and additional income for their friends in big banks and government.

At the beginning of a year you have the ability to buy $1.00 of goods for $1.00. Next year it's those same goods for $1.03. So if you aren't looking at the inflation/disinflation/deflation rate, you don't know whether you should keep your money in US$ savings or something else. We are in deflation as measured by credit destruction. Homes are becomming less costly. Fuel is less costly than two years ago. The stock market has been flat to declining for about 10 years. The government and the Fed are actively trying to hide or defeat this, but in the end the truth will play itself out.

Right now, it's certainly better to be in US$ than real estate, but its even better to have been in gold or silver for the past year or two. Will that continue? Given the political and economic environment, it looks like a firm yes, maybe even for a long time.

Where do stocks fit into all this? Right now, the environment for small business creation is difficult.  The stock market is best viewed as the top of the publicly accessible marketplace for business ownership. It truly relies on the growth of small business in one form or another. There are some exceptions due to timings and commodity products, but as a general rule healthy small business growth will produce healthy large business growth.

Small businesses don't believe in the recovery. Just check here:

http://tinyurl.com/25jlo7j

As far as yield relationships are concerned, that's all backward looking data. Forget the past. We are in a different kind of time right now. An unsettled time. The future is where we must look. The future is what we must build.

When the environment for individuals and small partnerships becomes better, when new small businesses begin to operate in your local neighborhood, when your buddy says he's opening a business to do or supply or produce something, that will be a good time to start looking more closely at the bigger companies, and at IPOs.

Right now is a time to be cautious about stocks. That doesn't mean not to own them, just realize that it may be a very long term hold for a reasonable return if you don't fully understand the future of the business and it's operating environment.

-MikeMark

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#2) On September 27, 2010 at 3:51 PM, MikeMark (29.86) wrote:

Here's the link to Small Business doesn't believe in recovery.

 

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#3) On September 27, 2010 at 4:10 PM, TMFAleph1 (96.14) wrote:

Where do stocks fit into all this? Right now, the environment for small business creation is difficult.  The stock market is best viewed as the top of the publicly accessible marketplace for business ownership. It truly relies on the growth of small business in one form or another. There are some exceptions due to timings and commodity products, but as a general rule healthy small business growth will produce healthy large business growth.

Thanks for your comment, MikeMark, but I'm not sure I follow your logic here: Why are small businesses the key indicator of stock market performance?

Alex D

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#4) On September 27, 2010 at 5:15 PM, MikeMark (29.86) wrote:

They aren't just a key indicator, they are a key Leading indicator. 

Small business creation is where economic growth begins. Small business startups are the only entities that reduce unemployment.  When small businesses are being created employment increases. This means that in general the base of the economy is building. More people are being gainfully employed. More growth in wealth occurs. What will follow is the IPOs of smaller firms and asset sales of smaller firms to larger businesses.

Viewed in one way, the stock market is our window into that process, and our ability, as a smaller partner in a business, to purchase into that growth.

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#5) On September 27, 2010 at 5:33 PM, MikeMark (29.86) wrote:

The Motley Fool was essentially founded upon these ideas.

Iomega and America On Line are two of the growth indicators from the early 1990s (and just before). The early group of people of the Motley Fool (on AOL) found Iomega by watching the growth of employment indicated by full company parking lots. Ask the guys. I'm sure they enjoy telling the story.

Interestingly, Apple is one from the late 1970s and early 1980s. These few examples are the ones that IPOed. I'm certain you can find hundreds that sold assets or a combination IPO and asset sales instead.

Enjoy,

-MikeMark

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