Junk Glistens Under ‘Bernankecare’ as Worst Stocks Win

According to Bloomberg,

Carl Giannone says he’s given up hunting for quality stocks. Now he’s simply riding the wave of upward momentum in the U.S. market.

“It’s a game of musical chairs,” said Giannone, who manages an equities team at T3 Trading Group LLC in New York. “You just want to make sure you can sit down.”

The Federal Reserve’s near-zero interest rate turns five years old next month, the longest period without an increase in history. Coupled with more than $3 trillion of asset purchases, it adds up to “Bernankecare,” said Joshua Brown, chief executive officer of Ritholtz Wealth Management in New York. And it’s causing parts of the market to behave strangely. Stocks of companies with weak balance sheets are rising twice as fast as stronger ones; junk borrowers get rates lower than their investment-grade counterparts did before the credit crisis; and initial public offerings are doubling on their first day of trading.

While in the minority, some investors say prices have climbed so high it’s possible to look ahead and see an ugly end. Laurence Fink, chief executive officer of BlackRock Inc., the biggest U.S. money manager, said in an interview with Bloomberg Television on Nov. 12 that he feared a bubble and the Fed ought to quit buying so many securities.

The PriceJunk Glistens Under ‘Bernankecare’ as Worst Win in Stocks, Bonds







“At some point we’ll have to pay the price of this,” said Michael Shaoul, chief executive officer of Marketfield Asset Management LLC in New York. Among the woes Shaoul foresees: “higher inflation, higher interest rates, much more difficult business conditions.” But it’s a long way off. “I would be very surprised if this bull market ended sooner than 18 months, and maybe it’s 36 months,” Shaoul said.

The Standard & Poor’s 500 Index has rallied almost 26 percent in 2013, on pace for its best yearly gain in a decade. Futures on the index expiring in December were down less than 0.1 percent at 1,787.50 at 9 a.m. in New York.

Almost everything in the equity market is rising, which worries Jamie Potkul, chief investment officer of the Bread & Butter Fund. About 450 stocks in the S&P 500 are up this year, making it the broadest rally in at least two decades. That’s left investors with fewer buying opportunities than during the technology bubble in 2000, when the rally was propelled by an ever-shrinking pool of dot-com stocks, Potkul said.

At the same time, investors are awarding some of the highest valuations to companies that have struggled to produce consistent profits. Amazon Inc. (AMZN) trades at about 1,300 times reported earnings. Netflix Inc. is valued at 197 times income and Consol Energy Inc. has a price-earnings ratio of 104.

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