Tags: dividend | currencies | central bank | party

Central Banks Juice Up the Markets Once Again

By    |   Monday, 13 May 2013 07:53 AM

Back in February, I was asked on my Fox Business Network interview where I felt stocks were going. I told the interviewer, Gerri Willis of the Willis Report, that I believed the Dow would hit 15,000 to 15,500.

This sounded farfetched at the time because the Dow was around 13,800, and it had just had its biggest pullback of the year at that time. The economy was still performing poorly and the sentiment in the market was very negative.

Well, as it turned out, the Dow hit 15,000 last Friday. So they called me back up and asked me to be their headline story for that night as they reviewed my call on the market and then they wanted to ask what I felt about the market from that point on.

While I'm still mildly bullish on the overall market, I am growing a bit more cautious now and I do expect a major pullback coming within the next 90 days.

However, I will say that the central banks of the world are doing their part to try to keep the party going.

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For instance, within the past week or two, Europe, India and Australia have all lowered their interest rates. And as I'm writing this, South Korea just joined in on the party and cut its interest rate, too.

Lower rates act like fuel to a fire in helping juice up their economies and also their stock markets.

Additionally, savers are forced to take on more risk to get any real kind of yield at all since the central bank is essentially causing savings accounts, money market accounts, CDs, etc. to earn less and less with each interest rate cut. Therefore, this causes investors to have to move into stocks that pay a decent dividend yield. This, in turn, helps to boost stock prices.

But other central banks are handling this in other ways.

For instance, Russia is considering making some of its state-controlled public companies payout 35 percent of their profits in dividends to shareholders. That would encourage more investor ownership in these stocks.

Switzerland is helping its economy and stock market by reiterating that the central bank is keeping a cap on the franc by not allowing it to rise.

New Zealand, on the other hand, is trying to juice up its economy and stock market by directly intervening in its currency. This means the central bank goes into the currency market and sells the currency.

I can't help but believe that these guys have all been on the phones with each other because they're all making these moves all within days of each other.

It's like they are taking another collective stab at boosting both their economies, which would attempt to lift the entire global economy and, thus, the stock markets of the world.

Therefore, we could see the party last longer than it would normally if the central bankers of the world weren't being so actively involved right now. So for now, the party goes on.

However, just realize that stocks here in the United States are beginning to get to overvalued levels according to the average price-earnings (P/E) ratios of the major indexes. This doesn't mean that stocks have to immediately sell off. They can remain overextended for months on end.

But once the party does come to an end, there will be a heck of a fall.

The remedy? Invest in the companies out there that have P/E ratios that are far lower than that of the major stock market averages.

The Standard & Poor's 500 is at a P/E of 18 right now. Yet the stocks that we hold in the Ultimate Wealth Report have P/Es of 4 to 11.

Editor's Note: Obama ‘Blunder’ Spawns Massive Profit Opportunity

In other words, we're paying a far lower price for our stocks than the average investor is that holds an S&P 500 index fund or an exchange-traded fund that tracks the Dow and other indexes.

Keep your risks lower from this point on by buying companies that have been overlooked and that have low P/Es, yet are huge, solid companies with above-average dividend yields. That's the plan that we're sticking to.

If you don't know which type of companies you should own, come check out the stocks that we're buying in the Ultimate Wealth Report portfolio.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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SeanHyman
Back in February, I was asked on my Fox Business Network interview where I felt stocks were going. I told the interviewer, Gerri Willis of the Willis Report, that I believed the Dow would hit 15,000 to 15,500.
dividend,currencies,central bank,party
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2013-53-13
Monday, 13 May 2013 07:53 AM
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