Large-Cap Stocks Are The Cheapest They've Been In 30 Years

Barton Biggs the crusty old 1999 Bear now turned Bull is betting on one more year of another positive market.

Nothing like last year but still something better than a 1.8% Bank CD.

(This guest post comes courtesy of The Mad Hedge Fund Trader)

Confessions of a Bull. Barton Biggs, founder of mega hedge fund Traxis Partners, spent an hour outlining his current investment strategy with me. Barton is a man of strong opinions, backed with intensive research, which he communicates with his characteristic gravel voice. I spent the better part of the eighties debating every pebble of the investment landscape with Barton. As I recall, what to do about Japan was the topic of the day, and I was bullish.

Today, Barton can say with "real certainty" that large cap multinational equities are the cheapest they have been in 30 years using sophisticated models that analyze price/sales, price/free cash flow, price/earnings, and a whole host of other metrics. Looking just at price/book ratios, these stocks have been this cheap only three times in the last 120 years.

Big cap technology stocks, like Microsoft (MSFT), Intel (INTC), Cisco (CSCO), and Oracle (ORCL) are at the top of his list. Other multinationals with plenty of emerging market exposure are attractive, such as Caterpillar (CAT). The easy way in here is to simply buy the S&P 100 ETF (OEF).The market is now at a 15-16 multiple, discounting S&P 500 earnings for 2010 at $75/share. A stronger than expected economy will take that figure as high as $90/share, which the market is not expecting at all.

Barton sees the US as half way through an economic recovery, and the main benchmark indexes could surprise to the upside, as they have such heavy big cap weightings. He would avoid domestic companies, such as those in real estate, as the environment for stocks generally is poor. He foresees a "new normal" of a lot of volatility in stocks for the next 4-5 years. Longer term he sees US GDP growth downshifting from the heady 3.8% annual growth rate of the last decade to only 2.5 % in this one.

But big cap multinationals should be able to bring in a reliable 5%-6% annual return on top of inflation. Looking at the world as a whole, Barton thinks Asia is the place to be. A bubble may be developing in China, but it is at least 3-5 years off, and there will be plenty of money to be made until then. India is another big pick because it is ten years behind China, and has yet to experience its big growth spurt. South Korea, Thailand, H-shares in Hong Kong, and Turkey are also lining up in Barton's sites. Looking at a 1%-1.5% growth rate, things look grim for Europe, with the possible exceptions of Poland and Russia. Traxis is short Brazil, because it has already had a great run, and because the country still faces some severe social problems.

Commodities had their run last year, and won't do much from here, but they aren't going to crash either. He sees oil grinding up because the cost of new sources is becoming astronomically high. Barton avoids gold because it has no yield or PE, and would rather not be associated with the crazies that inhabit that space. Bonds will be deflation driven for the next year, but are definitely not for your "Rip Van Winkle" investor, as they represent poor value for money. Real estate is dead money.

To hear my interview with Barton at length, please click here.

Featured Trades: (MSFT), (INTC), (CSCO), (ORCL), (FXI), (PIN), (EWY), (THD), (EWT), (EWH), (TUR), (PLND), (RSX), (EWZ), (USO).

NOTE: Give me a pat-on-the-back for my last months call on the third mini-market correction (-7%) ending. I'll call your attention to just one good guess...AIG then $23 now $33.

Now lets just hope the market can inch out a new high. But I'd be shocked if we got above 11,000 before May. And the biggest opportunities in this bounce came from the stocks that rolled-over last Sept. many in the Oil Service and Financial sectors, along with my two China small cap. picks.

Commercial Construction Hurting Banks

Commercial Loans Now Nightmare for smaller Banks.

In my life time commercial real-estate markets have always been a lagging economic indicator not a leading indicator. When my younger brother who owns a Florida excavation company told me business was still booming in 2007 despite the tumbling housing market, I predicted he'd see a big fall off by 2008.



Now that it has come true, just how bad is it? The "experts" I listen to, including FDIC chairwomen Sheila Bair expect more defaults and bank losses on commercial loans. The FDIC agency reported that the banking industry lost $3.7 billion in the second quarter amid a surge in bad loans made to home builders, commercial real estate developers and small and midsize businesses.

The New York Times (Sept. 4th) published an article which stated,
Even as the economy may be recovering, banks across the country are confronting a worsening outlook for their construction loans, an area that boomed for much of the decade.

There are no "green shoots" for commercial construction and real-estate.


Reports filed by banks with the Federal Deposit Insurance Corporation indicate that at the end of June about one-sixth of all construction loans were in trouble. With more than half a trillion dollars in such loans outstanding, that represents a source of major losses for banks.

Construction loans were a primary source of revenue for many banks, particularly smaller ones without a national presence. Other types of loans were not easy to make. A handful of big banks came to dominate credit card loans, for example, and corporate loans were often turned into securities.

So, while plenty of leading economic indicators show positive signs and that the American single family housing market has improved...commercial real estate construction seems likely to get worse.

Banks have been taking losses and cutting back their commitments for a couple of years on home construction. At the end of June, $173 billion in construction loans related to single-family homes was outstanding, barely more than half the peak level reached in the fall of 2006, when the housing market was booming. At the end of June, $291 billion in commercial real-estate loans was still outstanding, (down only a few billion from the peak reached earlier this year).



“On the commercial side,” said Matthew Anderson, a partner in Foresight Analytics, a research firm based in Oakland, Calif., “I think we are fairly early in the down cycle.” Foresight estimates that 10.4 percent of commercial construction loans are troubled, but expects that to increase as the year goes on.

Now do not assume the American stock market must fall too, just because lagging indicators like commercial real-estate markets and unemployment are horrible. Yes, it can easly fall a 1,000 points, even if the worst is over. In fact, most bulls expect a 5-10% correction between September and October. But plenty of people perdicted in June when the DJIA was only at 8,200 it would fall back to 7,200 too. Those who listen to that advice lost another 10-15%.

The lesson to remember, is the stock market is a leading economic indicator. You'll recall it started falling in the fall of 2007 when few news reports foresaw any issues in commercial real-estate. In fact the usual Donald Trump disciples were touting real-estate investments while only a few outcast Economist like Nouriel Roubini were predicting doom. Even Ben Bernacke said he saw no real-estate bubble in 2007. If you are only investing when the news is great -you missed the boat along with 75% of the gains. Just one more reason I advise people to have a long term plan before they start worrying about what stocks to buy.

Last year, we learned the regulators, like the bankers, and Wall Street investment bankers did not comprehend the risks of the exotic instruments dreamed up by financial engineers. This year we are learning that the regulators, like the bankers, also failed to understand the risks of the generous loans that the banks were making. At the very time bankers should have been reducing commercial loans they were expanding, thus pushing the real-estate bubble into the stratosphere.

We're all hearing about empty malls due to over building which resulted in a glut of malls. Maybe we're just all shopped-out? Perhaps someone will do a research paper correlating our mountain of personal debt to our glut of malls.

Here just one example of a funeral being held in my area for what was to be the city's downtown area rebirth.

Columbus City Center was developed by the city as part of the Capitol South development, opening on August 18, 1989. It was pitched to investors and taxpayers as a "must have" to revitalize Columbus downtown. Now a building wholes economic life should be 50+ years is being torn down in less than 20 years (to make room for next big idea).



Ok, after writing this article and listening to these experts -I'm depressed.

If you're depressed over the economy and short on Prozac then go get a shot of inspiration at The Wright Inspiration Station TM or if you need an accounting or finance refresher course go to The Wright Education Station TM

New Home Sales Hit Historic Bottom

The chart above shows the trendline of American new home sales back to the 1960's. The blue lines represent recessions and durations.

Declining new home sales markets tend to bottom in January. And this seemingly endless 5-year continuous decline ended this January 2009 at new historic lows. This bust surpassed every other American reale-state decline since the 1960's.

The magnitude of this decline is amplified by the fact the number of households in 2009 is around 112 million...more than double the 53 million during the 1960's.

Below are two real-estate news reports from the 1st quarter. Combine this depressing news with relentless negative news about Banks, stress-test...and it's no wonder we were a depressed Nation preparing for a Great Depression.

"New homes made another new record low, with sales down 10.2 percent to 309,000 units. Despite this reading, inventories relative to sales actually made a new high. The months' supply of unsold homes rose from 12.2 to 13.3, a new record high. This means that home prices will remain under downward pressure."

TERRIN GRIFFITHS, ECONOMIST, CALIFORNIA CREDIT UNION LEAGUE, RANCHO CUCAMONGA, CALIFORNIA:

"The drop in new home sales is not unexpected. Home buyers are remaining cautious as the current economic storm takes its toll on jobs and confidence and thus, home buying. Those forces against buying will remain strong so while there might be a slight boost ahead due to tax incentives, realistically things are going to remain weak for some time."

LAWRENCE J. WHITE, PROFESSOR OF ECONOMICS, NEW YORK UNIVERSITY'S STERN SCHOOL OF BUSINESS:

"This is of course yet another indicator that the housing market is in shambles and we are not out of the woods yet. There is a glut of supply on the market and more people want to sell than buy and that is driving prices down generally. A lot of people are seeing bargains, but are not ready to buy. Rates have fallen, but home prices continue to fall. People think they will fall more, so they are staying on the sidelines."

"Eventually we will get to a bottom and these people will kick themselves that they did not buy. At the very least, new home sales should continue to fall for the next few months."

Now with the benefit of hindsight and a chart we can see this was the bottom of a long and painful 5-year decline.

New home sales are now up over 30% from their lows, in yet another sign that the economy is improving. This, in combination with the more than doubling in the price of major homebuilders stocks from last year's low, constitutes strong evidence that we have seen the bottom in the housing market. All this activity also suggests that the combination of sharply lower prices and relatively low mortgage rates has created the conditions necessary to clear the housing market. Market forces are fixing the housing problem.

While the bottom in new home sales appears in more price declines are to be expected. And commerical real-estate trends tend to lag 1 to 2 years behind individual homes. Expect to hear more negative news in that sector.

Should you buy a major home builder stock now? By the looks of their stock prices you're already to late. Consider buying after the $8,000 first-time home buyer sugar high wears off or on any major market pull back. Still,the quality names were the first to rise. You might consider looking at two dogs (laggers) with fleas BZH and HOV.

More Green Shoots & New Market Highs

For the fourth straight month the leading economic indicators are pointing up. Now two regional manufacturing surveys show manufacturing activity is rising. And July home sales surged for the second consecutive month. All this positive news pushed the market to new highs last Friday August 21st, preventing the much expect market correction, for now.

Five More Positive Economic Indicators Denied Perm-Bears Satisfaction.

Since the March 9th market bottom, we have been witness to the greatest American stock market advance since the 1930's. Those brave investors who dared jump into the eye of the hurricane or stayed the course are to be congradulated for having faith in the long-run. But this is no time to party-hardy or dump a ton of new money into a market that has soared 52% in just 165 days. This is a time of thanksgiving and reflection. Now is also the time to question how likely is this good news to continue without some bad news and market pull-backs.

1. The Conference Board said its index of leading economic indicators rose for a fourth straight month in July. The index, intended to forecast economic activity over the next three to six months, suggests the recession has bottomed and the economy will soon start growing again. Six of the 10 indicators that make up the index rose in July.

2. A survey of manufacturers in the mid-Atlantic region on Thursday showed that factory activity rose in August for the first time in nearly a year. The report by the Federal Reserve Bank in Philadelphia followed a similar survey reported Monday by the New York Fed that also found an increase in manufacturing activity after months of negative results. The rise in both surveys indicates manufacturing is growing even in areas without significant auto-related production, economists said. The auto industry has enjoyed a big boost from the government's Cash for Clunkers programs.

3. July had the fewest job losses in almost a year. The government said companies cut 247,000 jobs in July, a large amount but still the smallest loss since last year. Yes, this is one of those less worse is good news. One can see the inverse correlation of declining new unemployment claims which peaked in February and have been falling for five months. Bears point out the last two weeks have seen claims rise.

4. The official unemployment rate drop unexpectedly to 9.4% in July its first drop in 15 months. Yes, many private economists and the Federal Reserve still think rates could top 10 percent by next year. Yet, this was a positive surprise as an increase was expected. And as any Economist will tell you unemployment rates are a lagging indicator.

5. Home sales in the Midwest surged 8.5 percent in July, the second straight annual increase, as new home buyers snapped up properties to take advantage of a temporary federal tax credit. Nationally, home resales rose 5.6 percent in July, the first annual increase since November 2005. Affordability is driving sales -- the median sale price fell 15 percent to $178,400.

"Looks like the recession ended in June," Tim Quinlan, economic analyst for Wells Fargo Securities, wrote in a research note. The National Bureau of Economic Research, which officially declares the start and end of economic cycles, has in the past set an end-date to recessions after two to three straight months of gains in the leading indicators, Quinlan said.

Now For The Bad News

The Mortgage Bankers Association, said more than 13 percent of American homeowners with a mortgage are either behind on their loan payments or in foreclosure — a record tally as the recession leaves more people unemployed. About a third of new foreclosures between April and June were prime fixed-rate loans, up from one in five a year earlier.

Markets are always forward looking. And it's ditto for this market too. Yet, this doesn't mean the market has ESP to foresee the 2010 economy. No, it just means it expects to see an improved second half of 2009. Remember the 2001 brief recession? It was declared officially started in March and ended around November 2001. The market after a climatic September sell-off after 9/11 turned and climbed into March 2002. The Market then tumbled all year long reaching new lows in anticipation of a disappointing weak recovery.

One of the real big economic worries is the need to create new jobs (not just maintain jobs). Scott A. Heintzelman, CPA, CMA, CFE a Partner with McKonly & Asbury, LLP has dug deep into the Bureau of Labor Statistics report to uncover their measure of labor underutilization a.k.a. Real Unemployment. The Real Unemployment Rate is 16.8%.

Market Results: The Biggest Advance Since The 30's - Thank you, I'm leaving the party early.

This has been the strongest market advance since the 1930's. The perm-bears have missed the greatest six month advance in their lifetime. Still, it's hard to image another 10% advance without more than a 5% pull back. But it's possible. In August 1981 the market rose for 12 straight months with only a few 5% pull-backs.

I'm thankfull for the last 1,000 point gift driven by so many green shoots. But I'm cashing in most of my general market chips (S&P Index Funds) before the party ends and the market disappointments arrive. I'll be happy to jump back onto the bandwagon after a pull-back.

What Would Jesse Livermore Do In This Market?

Would Jesse Livermore Sell, Buy or Fold?
If you are a market trader you've know nothing goes straight up or straight down for six months. So rather then debate if the market is moving in a rational or irrational direction based upon economic indicators let's just get down to protecting our assets.

I wonder what Jesse Livermore would do? Stay the course in what's been working? Short the market? Rotate out of the cyclical stocks that got us to the party into the health care stocks that missed the party? Cash in your chips and avoid the notorious months of September and October?

The Traders Motto
The legendary early 20th century stock trader Jesse Livermore said, "They say there are two sides to everything. But there is only one side to the stock market; and it is not the Bull side or the Bear side, but the right side"

Jesse Livermore started his trading career at the age of fifteen. He ran away from home with his mother's blessing to escape a life of farming his father wished him to have. He then began his career by posting stock quotes at the Paine Webber brokerage in Boston. He went from these humble beginnings to owning a series of mansions around the world, each fully staffed with servants, a fleet of limousines, and a steel-hulled yacht for trips to Europe. He married his second wife Dorothy, a beautiful Ziegfeld Follies showgirl when he was about 40 years old. So, Jesse Livermore's rise to riches and persona matched the roaring 1920's.

Was It Skill, Luck Or Manipulation?
The legendary trader status of Mr. Livermore leaves new hopefuls with the notion Jesse became rich, famous and lived happily-ever-after. The critics claim that prior to the new regulations of the 30's and in the days when news took time to travel, it was easy for stock manipulators and traders to make fast money.

The facts show, during his lifetime, Livermore gained and lost several multi-million dollar fortunes. Most notably, he was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively. He subsequently lost both fortunes and in 1940 committed suicide while married to his third wife. I found it interesting that his third wife had been married four prior times and all four husband committee suicide. I find no discussion of an investigation also interesting. Tragically his son and grandson also committed suicide.

So, much for living happily-ever-after Walt Disney style.

The Right Side Is The Only Side
Yes, knowing Jesse Livermore's whole life story gives new meaning to his famous quote, "...there is only one side to the market; and it's not the Bull side or the Bear side, but the right side".

Let, me know what Jesse Livermore would do now.

Details On Jesse Livermore Trading Advice

Modern Portfolio Theory MPT Fans

The Great Depression & Stock Market Facts

Market Up 50% -greatest advance since 1930's

Will Newton's Law of Gravity apply in August?

After a 50% rise from the March 9th low any prudent investor would rationalize it's time for a 10% correction. Of course, in June after the DJIA had fallen 6% from a high of 8,600 everyone was talking..."head and shoulders"..."sell now were going back down to 7,500". Yet, the market denied many "experts" their prediction once again. It soared up over 1,100 points to reach 9,200.

The now 50 percent S&P rally from the March lows is the best move in stocks since the 1930s!!! The Nasdaq is up an astounding 59 percent. Stocks have recaptured the levels from early October.

What Now?

Ok, now what? Well, if you do not believe in little green shoots and assume this is a cyclical Bull in a secular Bear market like in 1929-34 then you're cashing in your chips or shorting any stock that's had a big run. But as I watch the daily market indicators I see mostly strength and little weakness. Why? How can this be? Is this rational?

Drawing Wisdom from past legends.

Let's draw wisdom from a man who needed his father to bail him out financial when he was nearly wiped out at the onset of the Great Depression in 1929...John Maynard Keynes said it best: "The market can remain irrational longer than you can remain solvent". And a more famous money manger legend, Sir John Templeton, said Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. I'd say were still in the "skepticism" phased based upon all the disbelief about "green shoots".

Adding in my insight.

Yet, is the market really irrational, rational or just plain emotional? Maybe it's all of the above. This I know...the market is always forward looking. The cumulative wisdom of the market is betting the economy will be better in the second half of 2009 then the first half.

And now investors in the market are being helped by two groups: FIRST -traders who believe the market must correct (so they short stocks) and SECOND -by the billions of Money in Money Market Funds where people are realizing their earning less than 1/2 of 1%. With 6 months of a positive market MMF people are now more emotional comfortable with moving money into the market which pushes prices higher and forces those short-traders to cover their bets. Thus, it's the inverse of last summer where selling begets more selling.

Historical facts about August

Since I'm not paid to make forecast for Finance Toolbox or selling investment news letter subscriptions let me just leave you with some additional education for you to consider. According to market research in an article written by Nick Godt of MarketWatch here are the facts:
The market, as measured by the broad S&P 500 index, has advanced in August 60% of the time in the 81 years since 1927, for an average gain of 4%, according to Standard & Poors. And since 1999, August has brought gains seven times out of 10.

Since World War II, August months have tended to bring gains but not by as much as in other months of the year, according to RDM Financial. Since 1945, August has returned 0.4%, placing it 10th among the 12 months of the year.

"However, when the economy is rebounding, then the market has tended to put in a much stronger performance [in August]," said Michael Sheldon, market strategist at RDM.

Many market observers believe that back in March, the market has hit its lows of the bear market that followed the financial crisis. And on the 14 occasions that have followed bear-market bottoms since 1932, the S&P 500 has risen 10 out of 14 times in August for an average gain of 1.2%.

"Past performance is never 100% guarantee of returns in the future," Sheldon said. "But the outlook for August continues to be more positive than some would think," he said . I'm with Michael the correction may have to wait until month end or September.

Son of Modern Portfolio Theory

The Father of Efficient Markets Hypothesis is Eugene F. Fama. His son Fama Jr. explains his fathers work in common sense terms...sparing you the pain of learning all the mathematics' and research that lead to this discovery.