Can you feel the desperation?

The market has become a beggar.  Begging for more stimulus from the Federal Reserve.  You can smell the desperation in the air when the only thing that really gets the market excited is for more stimulus.

We all know what happens when a parent constantly sends their kid more money.  Sure, if they have a flat tire, or some emergency, then there is nothing wrong with helping out.  Provide the liquidity they need, but ask that they slowly pay it off.  If you keep giving them more money every time something goes wrong, then they'll never plan ahead and take care of things themselves.

I have no problem with the Federal Reserve stepping in for emergencies.  Their role should be to step in and provide liquidity when markets are bottle-necked for temporary reasons.  In and out and nobody gets hurt.  The problem now is that the Federal Reserve is being asked to help out over, and over, and over.  The market then becomes a huge manipulated mess.  The benefit of their role is being overdone, and will only start to create larger problems.  At some point, you have to let markets do what they are intended to do.  They are only delaying the inevitable if they are constantly needed to float markets.  Nobody makes the hard decisions, because they know more relief will come from the Fed.  They may be helping out the banks, but what about us?  I'm afraid one day, week, or month, we are going to have a rude awakening.

It's a bull market, until it isn't.   I won't be surprised if QE3 measures mark the top soon after in the market, and a long decline commences.

A few very interesting charts.

The first shows the components of return.  Notice that valuations(P/E) have the largest effect of return.  Not earnings or dividends.

http://www.crestmontresearch.com/docs/Stock-Rolling-Components.pdf

Here is the PE through Q2 of 2012:

http://www.crestmontresearch.com/docs/Stock-PE-Report.pdf

The third is my favorite.  It shows the long term cycles.  We are currently in a secular bear market, which is defined by long term sideways to down action.  We can go back and see past secular bull and bear markets, and this chart shows the P/E ratio during those cycles.  Notice, that we have bounced back into the area where the majority of bull cycles top out at.  We are coming down from levels never seen before, and it looks like we have a ways to go.  We can reach lower valuations by either the market declining, or earnings rising with the market going sideways, or a combination of these two.  This is why there is no long term value to buying equities, at this time.

http://www.crestmontresearch.com/docs/Stock-Secular-PE.pdf