Tags: Rubin | stocks | bubble | Fed

Rubin: There's 'Realistic Possibility' Stocks Are in a Bubble

By    |   Thursday, 16 April 2015 09:00 AM

You can add former Treasury Secretary Robert Rubin to the list of those concerned that bubbles might be building in financial markets.

"I don't have a personal view on whether we now have [market] excesses or not," he said at a conference in Washington this week, MarketWatch reports.

"But it certainly is a realistic possibility when you look at the U.S. stock market, which is near all-time highs, when you look at covenant-light and now non-covenant lending, [and] a vast increase in fixed-income [exchange-traded funds]."

As for stocks, the S&P 500 index has tripled during the past six years and now stands less than 1 percent from its Feb. 25 record high. When it comes to valuations, the S&P 500 carried a trailing price-earnings ratio of 20.47 Friday, up from 17.61 a year earlier, according to Birinyi Associates.

While the Fed is focused on inflation and the economy, it should keep an eye on financial markets too, Rubin said.

"I believe that the Fed should take systemic risk into consideration in monetary-policy decisions, even though excesses and bubbles are impossible to identify with confidence except ex-post."

Elsewhere on the bubble front, the biotechnology sector is on a tear in the stock market, with the Nasdaq Biotechnology Index, soaring 63 percent over the last year. And that has some experts whispering the "b" word.

"My gut reaction is that biotech valuations are always too high," Amit Roy, a pharmaceuticals analyst at Foveal research group, told the Financial Times.

"We need to think about which patients are going to get given the drug. The same mistake is always made: the drug is amazing, but it is not amazing enough."

Some analysts overestimate sales, assuming a new drug will be taken by all the patients who would benefit from it, Roy says.

Valuation models have to be stretched to justify current stock prices. "When I look at valuations, the old way I used no longer works," Evercore ISI analyst Mark Schoenebaum told the Times.

"Almost all the stocks I cover trade above, in many cases double-digit percentage points, their base case discounted cash flow."

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You can add former Treasury Secretary Robert Rubin to the list of those concerned that bubbles might be building in financial markets.
Rubin, stocks, bubble, Fed
Thursday, 16 April 2015 09:00 AM
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