Investment Strategy Network

The total market is now only 8.7 points above 100% fair value (Fv) having dropped from 132.0% Fv earlier this year. The market in total and all market capitalization levels are well within fair value range. Over 40 stocks moved into UnderValue territory.

Flagstar Bank and TechTarget are added to the service in the USA replacing Perry-Ellis and SUPERVALU. Perry-Ellis has gone private and SUPERVALU was acquired by United Natural Foods. The Buy Watch consideration list continues to grow as stocks move past fair value into UnderValue ranges.

In the mid-1970’s BusinessWeek had predicted the “Death of Equities” due to inflation. I also remember in the early 2000’s many investment experts predicted the low to zero interest rates were “temporary”. I’m also old enough to remember the same saying for Japan. Well the death of equities did not occur and the temporary low interest rates in the USA are not so temporary. Now with the velocity of money supply increasing and factors such as personal income increasing the probability of higher interest rates is increasing, but not at a rate that should put fear in the hearts of investors.

Money supply and inflation generally are highly related however money supply velocity is necessary to have a full impact. Think of filling an automobile with fuel. You can fill the car completely with fuel (money supply) but unless the wheels begin to rotate (velocity) the car will not move. Central bankers have been filling the financial markets with money, but the consumer and businesses have not been adding velocity, until just recently.

Stocks continue to move back into fair value range from overvalued and new entrants into Buy Watch while the CPI annual rate of change has moderated recently after reaching 3.0% in July. August eased to 2.8% and now September has dropped to 2.3% a rate equal to March and only 0.2 points above the beginning of the year.
It may appear sometimes confusing when the Federal Reserve Board talks about continuing to raise interest rates when inflation appears to be moving in a non-inflationary direction. However, their rationale is based on the current annualized rate exceeding the central bank’s target rate of 2.0%.