Pause or Pull Back Time ?

Ok, so we made some more money, now what? Hold'em or fold'em? I'm in agreement with Mr. DoJo above. I'll keep it simple. The probability of another two weeks like the last two is slim and none. I hate to try to play the market timing game but after a monumental run up this is a better time to sell than buy. At best I'd guess we have a sideways zigzag trending to the downside. So if you're in an index type fund and want to be safe rather than sorry sell Monday or into the next up day.

Now this is not to say in a pull back all stocks will fall. No. Some stocks will hold ground and some will even rise. But can you tell me which ones? If you're smart enough to know which ones those are please post your picks for all to see. Since I'm not that smart I'd say if you want to hold or buy some stock now than first look at those blue chips paying fat dividends which have not enjoyed any big increases like BP, XOM, LLY, VZ, T, PFE and MO. Utilities can work here too.

The oil sector service stocks that were sizzling hot in 2009's first two quarters look sick and weak. Still if you get a chance to buy RIG or DO around $80 or below do so. Mr. Cramer says buy WFT. The natural gas index UNG declined the whole month of March. While there is good reason not to like this ETF index I'm buying at $7.45-7.50 today. This index has now been declining for two years, so I'm betting my downside risk is low. A related stock pick would be CHK.

So, I'd sum up my view as selling all big winners this month and reinvesting ( or holding)1/3 to 1/2 in the areas I've discussed.

2010 Market Probability & 5 Focus Areas

Is it 1931 or 1983? The bulls see the market mimicking 1983, the bears point to 1931. Those in the middle see many similarities with 2004. Barron's Michael Santoli reports. Not that 2010 is likely to disappoint. "We're back to an environment where the fundamentals have to come through," Doll said. "Companies have to deliver the earnings. When it's an earnings-driven market, there are gains but more muted gains."

Indeed, the biggest difference could be that stocks in 2010 are founded on tried-and-true measures -- financial strength, earnings power -- rather than high-octane speculation. That would favor big multinational firms in cyclical and growth industries that stand to benefit from economic improvement, namely technology, energy and industrials.

Technical and historical factors are at work as well. Sam Eisenstadt, former research chairman at Value Line Inc. and a veteran market observer, wrote in a recent MarketWatch commentary that evidence points to an above-average 2010 for stocks.

"After the first nine months of the stock market's rally from recession lows, the average pace of the stock market's advance clearly slowed," he noted. "But, and this is crucial, the market tended nevertheless to continue rising." He pegs the S&P 500 at 1320 by year-end.

MarketWatch commentary. This year the bulls have a good chance to retain the upper hand, though not without setbacks, and investors will have to be more selective. In that light, here are 10 ways to position your portfolio through 2010:

1. Buy stocks with a global footprint
In a slow-growth environment, bigger is better. Big companies have the clout to counter adversity and capitalize on it. "Bigger" in this case also refers to companies of any size with a broad global presence. Global companies have diverse revenues and operations, which both insulates core businesses and fosters innovation and expansion.

U.S. companies in the past decade have been impressive examples of how to operate effectively overseas. Moreover, these companies are exporting their business to fast-growing emerging markets. Almost half of the revenues for companies in the Standard & Poor's 500 stock-index now come from outside of the U.S.
"The demonstrated ability of S&P 500 companies to replicate their business [overseas] and earn attractive margins and returns abroad is the most important development of the decade," wrote David Bianco, Bank of America Merrill Lynch's chief U.S. equity strategist, in a December report.

"The global economy is going to continue to integrate," added Gary Motyl, chief investment officer of Franklin Resources' Templeton Global Equity Group. "Companies that have the best managements, strategies and balance sheets are going to take advantage of this." He said Pfizer Inc., is a good example. "What isn't reflected in the stock price," Motyl said, "is this company's ability to move into the emerging markets."

2. Use stock dividends as a bond substitute
Shares of companies with strong balance sheets and stable earnings growth are not only better-equipped to handle the economy's waves, but their dividend income is a welcome alternative to the uncertainty swirling around bonds.

"Current dividend yields relative to bond yields provide an attractive opportunity for investors," wrote Brian Belski, chief investment strategist at Oppenheimer Asset Management, in a recent research report. "A prolonged period of low bond yields may encourage investors to begin seeking alternative ways to increase income, and high-quality, dividend-paying stocks may be a solution."

Oppenheimer's recommended stocks fitting this bill include Johnson & Johnson, AT&T ( Bill Wright suggest Exxon, VZ, LLY, MO, PFE, VOD and DT at todays prices)

3. Buy larger-cap index funds
Large-cap stocks lagged their small-cap and midcap counterparts in 2009, but many observers say that big firms' time has come.

"Large, blue-chip companies are the last remaining pocket of undervaluation," said Keith Goodard, co-manager of Capital Advisors Growth Fund. "A basket of blue-chip companies with a 3% to 4% dividend is not a bad place to be."

If larger-company U.S. stocks outperform small-caps, then shareholders could do well holding index mutual funds and exchange-traded funds that track plain-vanilla, large-cap benchmarks such as the S&P 500, the Dow Jones Industrial Average .

Many S&P 500 companies, for example, provide global exposure, high-quality earnings, seasoned management and attractive dividends -- attributes that investors could increasingly value as the year unfolds.

"We believe that 2010 will be another positive year for stocks, and we established a 2010 price target of 1,300 for the S&P 500," Oppenheimer's Belski said. That would mean a gain of almost 14% for the index from Friday's close of 1145 -- a standout return for the market.

4. Stick with technology stocks
Technology funds were the best-performing U.S. sector in 2009, up about 63%, and technology is again the largest S&P 500 component. ( Bill Wright says buy intel on the pull back, even Dell at todays prices)

That's a cautionary note, but the sector's earnings prospects are nonetheless strong. S&P analysts are among those upbeat on tech stocks. "The sector is poised to benefit from a healthier global economy, a notable PC replacement cycle and considerable international exposure," the analysts noted in a recent report.

"They've got robust balance sheets, phenomenal free cash flow, and while the stocks have done well and valuations aren't as cheap, there is room for them to outperform," BlackRock's Doll said of the tech sector. He favors computer software and services companies over hardware and semiconductor firms, namely Microsoft, IBM and Oracle

5. Plug into the energy sector
Energy stocks have been on a tear so far this year. Energy-sector mutual funds are up almost 7% on average, on top of a 46% gain in 2009, according to investment researcher Morningstar Inc. The energy bulls are banking on a continuing global recovery and strong emerging-market demand, and strategists at Bank of America Merrill Lynch are squarely in that camp.

"Energy is our preferred global recovery play" and could be the year's best-performing sector, depending on oil prices, Merrill strategists wrote in a recent research report.

S&P analysts are also bullish, particularly for companies in the integrated oil and gas industry. But it's a tempered call that hinges in part on the global economy making a smooth transition from one that has relied on government stimulus to one that is earnings-driven. S&P's favorite energy stocks include Chevron Corp., Exxon Mobil Corp. and Superior Energy Services Inc.

For more market news and education go to Window To Wall Street®.

Note: Small investors should always first consider the benefits of a professionally managed (or unmanaged index) diversified mutual fund portfolio over owning individual stocks and bonds. All investing can result in losses.

Disclosure: At the time of this blog post I hold positions in the following stocks discussed in this article: Exxon, Lilly, Verizon Wireless, Vodafone and ESV.

Seven Reasons Why The Trend Is Your Friend

I will often joke about market technical analysis.

Daytraders often live and die by minute-by-minute moves and magical voodoo terms. Technical analysis is no more the holy grail than buy-and-hold investing. The presumption that the tail waggs the dog is dangerous and not grounded in any scientific evidence. Yet, my experience says it's of as much value as fundamental analysis in helping you determine if a stock could rise or fall. Above is the most recent analysis of the S&P Trend line which can help one reduce risk and increase profit opportunities. The idea is simple. Know when to plant seeds. Know when to harvest profits.

I was trained in Modern Portfolio Theory (MPT) in my business BBA program in the 70's.

Naturally at a University you'll learn what is believed to be the best researched and scientific based thinking of the time. Most often based upon utilizing mathematics to identify correlations and relationships in search of the holy grail of reducing ones risk while increasing the probability of maximizing your returns. So, all the Professors contributing to the knowledge of MPT, were strong mathematicians not past professional money managers.

The founding fathers of MPT, people like: Harry Markowitz Nobel Prize in Economics, 1990. Diversification reduces risk. The Role of Stocks James Tobin Nobel Prize in Economics, 1981 Single-Factor Asset Pricing Risk/Return Model. William Sharpe, Nobel 1990 Prize in Economics, for Capital Asset Pricing Model. Efficient Markets Hypothesis, Eugene F. Fama, University of Chicago. Fama was first to get access to using a Mainframe IBM computer to analysis massive amounts of historical data that had been collect in print.

Fama's, extensive research on stock price patterns was the foundation for Efficient Markets Hypothesis, which asserts that prices reflect values and information accurately and quickly. This was among the easiest of concepts to grasp. Yet, to this day this is the most misunderstood theory. Often those with no formal investment training such as journalist, will imply Fama's theory means the market must always be rational.

But the most valuable concept that I learned outside of the class room in real life money mangement pertaining both to the market and individual stocks was how to spot a simple trend and capitalize on that trend.

We spend a great deal of time trying to spot stocks heading in the right trend, or direction. Careful attention needs to be given to the support and resistance lines. These lines are also called trend lines.

Here are seven reasons why the trend can be your friend in investing:

1. These lines draw the general trend, or direction, the stock is heading. They’re not used for daily tracking, they’re more of a longer-term direction that the stock, mutual fund or commodity is heading. If you are using a longer term approach, the trend is what you really want to know, not necessarily the day to day wiggles in a stock.

2. Often times, the trend line will give you guidance in a stock for years, not just weeks or months. But these support and resistance lines are often bumpers, or guardrails, along the way. Stocks often drift toward their support or resistance lines and then bounce back in the opposite direction.

3. If you can pick off a stock you find attractive as it is bounces off the support line, it could be a terrific time to buy. The reason is you have a strong, logical place for your stop point...just under the support line, which is really close by. This helps minimize the amount you have at risk.

4. Some of the best winners come from stocks that are purchased just as the stock breaks through overhead resistance and forms new patterns. Holding the stock until it breaks support line (which might be possibly many months, or even years later) can really help your overall performance!

5. The reasons behind why a stock jumps through a brick wall are often not clearly visible. The reasons for the move may emerge days or weeks (or even a year!) down the road. But when a stock or a mutual fund breaks through the trend line, either up or down, it’s important news.

6. If a stock or mutual fund we are following breaks through it’s overhead resistance, we have a high level of confidence that the stock will continue to climb upward.

7. Lastly, if the support line of your mutual fund or your stock is broken, beware! This is a very clear signal we should consider selling a portion (or maybe even the entire) position. Breaking the support line is the ultimate sign that supply is now clearly in command. Your principal is now at risk.

Bullish Momentum or Bearish Mojo ?

Bearish triple Ms? Doje? Bearish flag? Bearish Cross? Bearish Reversal Candlestick Patterns? Advance on low volume bull trap? Say all the mojo vodoo you want, but the market exploded open today moving up 100 plus points within the first 15 minutes today.

After a year of listening to people say buy-and-hold and passive investing and EMT is dead...those who did nothing but stick with a passive index fund, are the real market gurus. I've listen to high paid money managers and CNBC "experts", say the market would turn south for months once it hit 8,500...then 9,500 for sure was the top...and now were at 10,500. Hay, I thought 9,800 was tops. I too was expecting a little 5% pull back, that never came in the index. Lots of stocks have pulled back but the market index has continued to climb higher.

Gold and commodities explode up today. No idea why the 180 reversal from last Fridays stronger dollar. India must be passing out free glasses of Champane to Americans visiting their country, as their new stock pile of gold rise in value.

Triple shorts and double short ETFs got clobbered today regardless of low volume. So should we change our thinking? Dow 11,000 now? Well,today was great for index investors but I saw a ton of selling during the first 30 minutes with many prices falling thereafter. So, lets listen to Ron explain this from his market technicals point of view. He explains why he's staying short and bearish near-term on the market.


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DOW Hits 10,400 What's Next ?

Now that the Market hit a new high 10 days ago what next?

What next? Dow 11,000? or 9,800? Well, after listening to all the newly minted market wizards on Seeking Alpha.com make continuous market crash perdictions, since the mother-of-all-bounces (in our lifetime) began, they final stopped about two weeks ago as the market was agin hitting new highs. Now that they stopped I'm ready to get very defensive. No as, I've said before, I see no 20% correction for certain in the next few weeks. Getting defensive, for me, means selling the stocks and sectors that have risen the most and rotating into stocks with perdictable earnings and good dividends that have not enjoyed a big market advance. And if there were a 5% correction you can bet I'd be looking to buy unless we had new negative economic data, in addition to our serious unemployment problem. Remember unemployment is a a very serious problem but if companies are expected to earn more resulting from these lay-offs and if the future economy is expected to get better then stocks can continue to slowly rise or go sideways as they did in 1983-84 and 1991-92 even as unemployment was high. But lets just consider whats more likely for the next few weeks.


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So, to help me confirm or reject my guess I'm calling in advice from the Voodoo Chartist as us EMT boys like to joke about. I'm not one to get excited about minute by minute market technical's and charts. But I do make major portfolio shifts in allocation between sectors, industries and cash based upon my technical advisors in addition to fundamental analyst recommendations.

When one chooses a technical advisor I recommend one be chosen based upon their knowledge of fundamentals, market history and knowledge of how portfolio managers think too. I'm going to share with you Ron Walker ( one of my advisors ), a man who's ego is in check and is worth your listening time. Now given the market has had its greatest move up since the 1930's I'm worried the markets now ready for another minor 3 maybe 5% pull-back similar to the last two.


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Another technical advisor I follow Carter Worth, of Oppenheimer Fund Management has also advised me a correction is now the most likely near term outlook. And we've said all along that the market seemed insistent on going back up to the pre-Lehman bankruptcy level of last September. We've hit those levels. Based upon his training and experience Carter says, "that's the wall we'll not climb above for some time now." He believes a correction is due. Does it mean we must have a sharp correction? No. It can be a slow back and forth but continuous drip down into December. Even if we have no correction now, I'd bet it would come in January when large investors choose to take capital gains for all of 2009 profits, on their 2010 tax return, simply by waiting to sell on January 1st 2010. Most likely the big winners in commodities related stocks will sold. But let's not start speculating beyond the next few weeks.

Last week I saw the fertilizers companies and telecom companies rise while oil drillers like my favorite RIG were extra weak. I've sold my fertilizer play IPI and oil tanker shipper FRO. I'll look to buy it back below $25, I hope. I'm holding my DRYS due to the rising BDI rate rising. I'd be looking to buy more RIG below $82. Metals like X and AA can be bought on any noticeable drop. Large banks and insurance companies like BAC, WFC, C, STI, GE, PRU, MET and HIG seem on very firm ground and in little risk of falling down more than 6-10% compared to other jumbo winners in 2009. I'd be looking to buy BAC, GE or HIG on any noticeable pull back. I also notice that some of my favorite defensive plays with excellent yields continued rising as other socks weakened last week. Finally boring defensive stocks like WMT, MO, LLY, PE, VZ and CHL (I hold positions it all four stocks) moved up. These stocks may finally be in a mini-break-out mode which makes them a safe play to hold (even in a correction) as one takes other short positions ( as Ron describes ) or moves to 50%+ cash levels ( which I am ).


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These videos are more for individuals with some good basic understanding of technical analysis. It's for those who want an in-depth market analysis and opinion on if the market is more likely to move down or up in the next two weeks.

Special Note: The average individual needs to spend more time developing a long-term savings and investing plan instead of a market trading plan. Market timing and market trading and daytrading is a very time consuming activity. Those selling monthly subscription services will always tell you "passive index" or "monthly dollar cost averging plans" or "buy and hold" is dead. Yet, many traders make less money than a simple buy and hold passive investing strategy. The down side of daytrading is rarely discussed. What does it cost you to be spending 8 hours a day five days a week on market trading?

USA Unemployment Hits 26 Year High

The American unemployment rate surged to 10.2 percent in October, its highest level in 26 years, as the economy lost another 190,000 jobs, the Labor Department reported Friday.

The nation’s jobless swelled to 15.7 million. Since late 2007, payroll employment has fallen by about 7.3 million. Only 1.8 million jobs were lost in the 2001 recession. So, this is 3 times worse. More than a third of the nation’s unemployed — 35.6% — have been out of work long-term, defined by the Labor Department as a period of 27 weeks or more — that's the highest proportion since World War II.

The jump into the realm of double-digit joblessness— provided a sobering reminder that, despite the apparent "technical" end of the Great Recession, economic expansion has yet to translate into jobs, leaving tens of millions of people still struggling. And many with a job are wondering if their next.

The labor situation is actually worse than what these figures and the 10.2% rate show. The government doesn't count as officially unemployed the so-called discouraged workers who have given up looking for jobs -- which in October numbered 808,000, up from 484,000 a year earlier.

There also were 9.3 million people who reported they had little choice but to work part time because their hours had been cut or they could not find full-time jobs. If this group and discouraged workers are included, along with others on the fringe of the labor market, the nation's unemployment and underemployment rate in October was 17.5%.

The last time the jobless rate crossed double digits was during the recession and initial recovery period of the early 1980s. Then, unemployment hit 10.1% in September 1982 and stayed at or above that level, rising to a high of 10.8%, until June the following year. This time around, unemployment has risen even faster and, by many analysts' and economists' predictions, could hold above 9% through 2010.

While it seems counter intuitive the stock market in 1982 was similar to 2009, as it also rose over 60% -even as unemployment was rising. Now let's hope the 2010 stock market is more like 2004 then 2002 market. Even, some market bulls find it hard to believe (with this recession dwarfing 2001) that we are at levels above DJIA 10,000.

Buy Doom Sell Boom

Now that the DJIA just hit 10,000 (again) I thought it would be interesting to listen to what the wanabe market gurus and high paid experts were saying in the first half of this year. Here are just two examples of the many classic doom perdictions.

I'll be the first to admit the most advance I was looking for was DJIA 9,500. But it has become clear to me I need to be looking to buy stocks on break-outs and pull-backs. And one can always find lower risk stock laggers to hold into year-end (as discussed in prior articles). Each day as I scan the market details I continue to find strenght in many stocks. Many stocks are above their 2007 levels. A few with excellent earnings outlooks like Apple and IBM are near their 2008 all-time highs!

But even in July, I was reading non-stop articles on SeekingAlpha.com from their mega posters preaching how, at DJIA 8,200, the market was due for a correction back to 6,500. When it didn't happen they wrote articles telling you why the market was wrong and they were right. The real problem was just to many kids with great educations but like knowledge of market history.

The lesson to learn? One must establish a long-term savings and investment plan. And one must understand that the market is a leading economic indicator not a lagging indicator. If you wait to invest only when the economy is ideal...you are too late! If you only invest when the economy is horrible and the market has declined by 40% you certainly stand a better chance at higher long-run returns.

What now? You, need to understand this market momentum can continue to push the market up, back to last summer's pre-Lehman Brothers collapse levels ( around DJIA 10,500 or S&P 1200 ), by year's end. Yes, at this point forget thinking you will see a 10% correction, about the most we'll get is 5% because traders and investors see benefits in buying the dips again. Now this momentum can turn negative in 2010 just as it did in 2002. But as professional traders say, "You need to trade the market you see not the one you think it should be" and "The trend is your friend" the two best money making ideas they never taught me in BBA or MBA investment classes.



The young man above was just one example of how individuals will extrapolate out the current trend (when making market predictions). Listen to one of the many high paid experts who was perdicting the DJIA would fall to 5,500 and the S&P 500 would fall to 400! Folks the S&P 500 is now at 1,100 ---- 275% above this guys perdiction.

In September I gave readers just one more example of how Blogger Youthful Investment inexperience (in understanding stock markets and the data behind charts) cost his followers thousands
Eleven Reasons These Charts Are Worthless

Eleven Reasons These Charts Are Worthless

Recently an individual (who unfortunately liquidated most of his stock holdings close to the market lows) ask me to explain how it was possible for the Stock Market to go up 55% when he had these two charts as proof (in his mind) it should be back to 1945 levels with earnings so low and P/E's at such an outrageous levels.

He showed me a "Blogger" he followed had also advised selling everything after posting these charts and his commentary. The "Blogger" saw these (among other information) as clear and present doom the market would fall back to the March lows by August. Yes, last last month we were to have a 3,000 point drop. Why didn't it happen he's wondering. Perhaps, he's more upset about the reality he missed the explosion up.

After I ask what formal investment education and experience the "Blogger" had he said he had no idea only that he like his postings (more like he like his rants). It's best I skip my response to that response and get right down to and example of the valued "Blogger" words of wisdom below:

"Forget hoping for the rally to continue and forget "buy and hold" for the long term. Without earnings to support them over the next year, stocks are toast. And where are the earnings going to come from while banks are failing in increasing numbers (yes, it's getting worse not better), unemployment is rising (no, it's not stabilizing), and the residential and commercial real estate crash continue unabated (no, they're not stabilizing either)? If a business is not part of the fascist keiretsu business model that has evolved in this country, that business is likely to be in trouble.
.....
It's official: Gold Versus Paper is calling the top in the stock market (I think it was yesterday and today confirmed it).....next comes a re-test of the March lows before mid-August (i.e. at least a 25-30% drop in less than 12 weeks). General stocks, corporate bonds and commodities are going to get shellacked.....Now I am not saying the March lows will hold in the general stock markets - there's a good chance we go right through them. But this is a minimum downside target for the major indices....This bear is hungry for some bull meat. GRRRRRrrrrrrrr!"

Now aside from the GRRRRrrrrr ,which I thought was cute, I hope no one gets hurt by this type of financial entertainment.

Now, to be fair, I've heard many non-financial professionals with excellent educational backgrounds and desire to be viewd as a "guru" with thousands of followers, give similar commentary. Commentary on why these charts are proof the market is not rational and must fall to 1945 levels now. Over the last three months they keep modifying their perdictions to: "any day now".

You can bet, if I didn't know what I'll share with you these charts would have caused me to not have invested any money into the market during November Q4 2008 and February Q1 2009 too. But ask yourself why no Goldman Sachs type analyst hasn't published the same warning using these charts? Perhaps they can not afford www.chartoftheday.com charts? Oh, there free. Well, maybe its a world wide conspiracy? No, then lets get into more plausible explanations.

I've learned if the market is not responding to my logic maybe there is something I don't know.I'll give you eleven detailed reasons why the these charts have caused so many people to be wrong. Wrong because they do not understand the accounting of the numbers and wrong because they do not understand how interest rates and inflation and foresight not hindsight impact investment decisions.





1. The way S&P computes its PE is open to honest debate. Famous Finance Prof. Siegel (later joined by another Famous Finance Prof. Shiller) brought this up in February, creating a debate.

2. The often-quoted "earnings of the S&P 500" is a highly massaged number. There is no GAAP or annual audit process by an independent outside auditor. Not that an Accountant would understand Voodoo Math. It is not the actual total earnings (which are available on a separate page in the S&P spreadsheet, labeled "Issue Level Data"). S&P has to massage the numbers so that, when they replace a stock in the index, it doesn't create a discontinuity in the index's value. You know when comparing an apple to an orange you fell better if the orange is painted red.

3. S&P has replaced about 40 companies in the last 12 months. Most of the companies responsible for the biggest earnings losses have been removed from the index. e.g. GM, Fannie Mae, AIG. So when you replace companies with no earnings with other companies with earnings the smart money knows the future S&P EPS will be better than those who only follow trailing earnings expect. No fair you say...the accountants principle of consistency is broken. Your comparing an apple to an orange. L.O.L. You need to understand Wall Street is a jungle and without a guide you may get eaten alive.

4. Therefore, many of the companies presently in the index did not contribute to the TTM "earnings" that S&P uses in computing its own current PE. They do not go back and restate past earnings to reflect later changes in the index's companies. Once they close out a quarter's "earnings," that number is locked in forever. So if you getting the picture comparisons to the past are difficult at best and at worst worthless.

5. Wall Street analyst know that the current P/E in this chart is grossly distorted by the Q4 2008 banks that had to take massive write-offs against toxic loans. But two points: 1) many of those companies are no longer in the index. and 2) If you're smart enough to understand accounting, finance and math you know the financial sector was the largest sector in the index and at the market peak FAS 157 require banks use market-to-market models for mortgage valuations.

6. FAS 157s impact makes comparisons to periods prior to 2007 almost impossible without a team of CPAs and MBAs restating S&P EPS and P/Es back to 1938 when it was banded (you can guess why). Much has been debated about the role mark-to-market accounting rules played in driving down the values of financial services companies, including many large life insurers. Mark-to-market accounting was prohibited in 1938, but the Financial Accounting Standards Board reinstated and strengthened it through actions in 1993 and in 2007. Forbes magazine publisher Steve Forbes has been particularly outspoken about the 2007 action. Some analysts, even insiders, say banks like Citigroup and Lehman Brothers marked down some of their C.D.O. exposure by more than 50 percent when the underlying mortgages wrapped inside the C.D.O.’s may have only fallen 15 percent. Bob Traficanti, head of accounting policy and deputy comptroller at Citigroup, said at a conference last month that the bank had “securities with little or no credit deterioration, and we’re being forced to mark these down to values that we think are unrealistically low. Who's right or wrong is not the point. The point is how it impacts the math going forward and makes comparisons to the past periods to difficult.

7. It is a philosophical or mathematical question what the PE of an index should be, anyway. Should it be the median PE of all companies in the index? The arithmetic average? Should it be weighted in the same way that S&P weights the companies in computing the index itself? Should it be equal-weighted? All of these could have arguments made for them.

8. In computing the P/E, S&P substitutes the value of the index for "P," price. So you have a derivative number, the index value, standing in for P, and another derivative number, the massaged "earnings," standing in for E, in the equation P/E. You see the simple becomes complex enough to require a math genius to figure if it has an value for comparing one period to another.

9. The P/E is based on TTM "earnings" and current "price." It is backwards-looking. Wall Street makes investment decisions for the future based upon forward-looking EPS estimates. When someone says the P/E is not sustainable, or has not dropped to the typical lows of 8 or 10 seen in the 70's and early 80's recessions, that's an uninformed statement (to be polite). They also forget the financial sector earnings

10. Using the logic the chart implies with its lines you should do what? Buy when market trailing P/Es average 7 or 10 ? Can you name me a time in the last 20 years when P/Es on the S&P averaged 7? No. 10? No. So, this person would be waiting 20 years for something that's not going to happen for a reason they do not understand. The problem with these charts is they don't come with a team of financial analyst to figure this out for you. www.chartoftheday.com is in the daily cranking out of charts and Internet hits not making or losing money on stock market investments business. And if you had used a P/E cut off of say 20 you would have sold Apple Shares at $25 instead of $150 or Google at $100 instead of $500.

11. Last one and most important point, if it were not for the preceding ten points: You can't compare a $1 of earnings in a 1975-82 environment of 10-15% annual inflation and 10-20% Paul Volcker induced prime rates to a $1 of earnings in an under 5% inflation environment of the 90's or under 1.5% with a discount rate of almost ZERO in 2009.

Now you know why your wait for average P/Es on the S&P 500 to hit 7 to 10 like they did in the 70's and 80's caused you to just miss the greatest Bull Market or Bear Market rally of our life time.

Three Point Bottom Line:

1. A mediocre investment plan consistently executed in good times and bad is worth more to you over 20 years than any chart you'll every use to make investment decisions. Combine this with a strategic asset allocation plan and semi-annual reviews and focus on your profession, not the market. People do not plan to fail they fail to plan.

2. Time in the market is better than timing the market if you lack experience and training.

3. Research constantly shows just a few months of the year account for the majority of the gains. Now I've never know a person smart enough to consistently be right on that prediction. GRRRRRrrrrrrrr will come to that conclusion too, in about 20 years.

Why It's Not 1982 Again

Two Cases For A Continued Bull Market, Ronald Reagan style. Both cases made by two very qualified sane men based upon the 1982 Economy and Bull Market begining. But, as much as I wish it to be true, I'm afraid I must agree with other less optimistic Economist and Novelist Thomas Wolfe who concluded "You Can't Go Home Again". Still, the Perma-Bears need to face the trillion dollar fact. There is a trillion dollars inside money market mutual funds earning less than 1/2% looking to be invested on any little pull-back. Yes, it's possible we stay in Bull mode through year end on are way back to pre-Lehman Brother levels. Still, the 2001-2002 market is fresh in my memory and my worry.

Excerpts from James Grants Sept. 19th, 2009 article: From Bull to Bear. James Grant argues the latest gloomy forecasts ignore an important lesson of history: The deeper the slump, the zippier the recovery. Even more amazing is the fact James Grant is a student of financial history and Perma-Bear who just been converted to a Bull believer.

"...Knocked for a loop, we forget a truism. With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery. To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: "The most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period."

"Growth snapped back following the depressions of 1893-94, 1907-08, 1920-21 and 1929-33. If ugly downturns made for torpid recoveries, as today's economists suggest, the economic history of this country would have to be rewritten.
...
At the business trough in 1933," Mr. Darda points out, "the unemployment rate stood at 25% (if there had been a 'U6' version of labor under utilization then, it likely would have been about 44% vs. 16.8% today. . . ). At the same time, the consumption share of GDP was above 80% in 1933 and the household savings rate was negative. Yet, in the four years that followed, the economy expanded at a 9.5% annual average rate while the unemployment rate dropped 10.6 percentage points.
...
Our recession, though a mere inconvenience compared to some of the cyclical snows of yesteryear, does bear comparison with the slump of 1981-82. In the worst quarter of that contraction, the first three months of 1982, real GDP shrank at an annual rate of 6.4%, matching the steepest drop of the current recession, which was registered in the first quarter of 2009. Yet the Reagan recovery, starting in the first quarter of 1983, rushed along at quarterly growth rates (expressed as annual rates of change) over the next six quarters of 5.1%, 9.3%, 8.1%, 8.5%, 8.0% and 7.1%. Not until the third quarter of 1984 did real quarterly GDP growth drop below 5%."

Excerpts from Economist Michael Mussa Sept. 20th, 2009 presentation: Ex-IMF Chief Economist Rosy View as viewed by Kevin Hall -

"The recession is over and a global recovery is under way," he began, unveiling a pile of data and historical charts to support his view that forecasters regularly underestimate recoveries – and are doing so again.

Where the IMF foresees just 0.6 percent year-over-year growth in 2010 in the U.S. economy and 2.5 percent globally, Mussa sees 3.3 percent growth in the U.S. economy next year and 4.2 percent growth globally. He projects a U.S. growth rate of 4 percent from the middle of this year through the end of 2010.

All forecasts tend to under predict the recovery. … I think that's what we are seeing this time," said Mussa, now a senior fellow at the Peterson Institute for International Economics, a leading research organization in Washington.
...
Mussa pointed to forecasts made at the end of the 1981-1982 recession, the closest approximation to today's deep downturn. ...

The Reagan administration projected a growth rate from December 1982 to December 1983 of 3.1 percent, as did the Federal Reserve. In fact, the real growth rate turned out to be 6.3 percent."

Two excellent articles -with one common comparison flaw. They both use the 1982 Ronald Regan bull market beginning to make their case but ignore what happen in 2002 after a much smaller recession ended in 2001.

Both point to how Economist were too pessimistic in their growth forecast and correctly pointing out how the actual recovery starting in 1983 had six quarters of outstanding GDP growth (5.1%, 9.3%, 8.1%, 8.5%, 8.0% and 7.1%).

They make an excellent point about Economist forecast but even rosy glasses Ex-Chief Economist Mussa is forecasting only 3.3% GDP for the USA next year.

This leads me to ask three questions:

1. How can 3.3% 2010 GDP led to six quarters of quarterly growth like the 1983 time period they reference?

2. Why do they ignore what happen in 2002 when the market declined for three straight quarters back to the 2001 lows, after the recession official ended in 2001?

3. Is America's 2009 economy similar to 1982-83?

Unfortunately (for me) 2009 is not like the 1973-83 stagflation economy. Back then Treasury Secretary Paul Volcker's needed to crush inflation with the highest interest rates in American history. ( I wishes this was 1982 so my savings would be earning 9-12% in my MMFs instead of 0.25%. I feel like I've been robbed by the 2001-2009 federal reserve policy ) .

If you are under 40 and think mortgage rates are a little high take a look at the 1979 to 1981 Bank Prime Rate in America. Notice how in 1981 the banks started lowing the Prime Rate (resulting from the Federal Reserve lowering the discount rates) from 20%to 11% in 1983. Yes, I said 20%.

This move alone allowed Stocks to rise as the value of each dollar of revenue or profit became more valuable in a lower inflation and interest rate environment. This phenomenon is call P/E expansion. You can see the proof from 1982 to 1999 as the average Standard & Poor Stock P/E rose from 7 to 32 as inflation and interest rates declined and the economy became more robust.

The decline from 20% in 1981 to 11% in 1983 also generated that fantastic six quarters of high GDP growth. I'd conclude that cannot be repeated in this environment.

Now just think about Car, Clothing and Appliance sales in 1982. The big three were all American. Imports were a much small percentage back in 1982. Today most appliances and clothing (just to give two examples) would be made outside America. In 1982 as those lower interest rates increased sales, American factories employed more American workers, who in turn had more money to buy more stuff (of which a much higher percent was made in America and nothing was made in communist China or Vietnam).

Now flash forward: Federal Reserve discount rates are already close to ZERO (no spending is being held back by high interest rates like 1981-82). Consumer debt is still at high levels and a recession like this causes even dual income employed families to want to spend less. Today when Americans do spend more money a much larger percentage goes to employing people outside America (than 1982-83).

Janet L. Yellen President of the Federal Reserve Bank of San Francisco (far more qualified then I) sees no comparison. And Nobel Prize Economist Paul Krugman explains why there is no comparison using the same logic.

"A lot of what we think we know about recession and recovery comes from the experience of the 70s and 80s. But the recessions of that era were very different from the recessions since. Each of the slumps — 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 — were caused, basically, by high interest rates imposed by the Fed to control inflation. In each case housing tanked, then bounced back when interest rates were allowed to fall again.

... Post-moderation recessions haven’t been deliberately engineered by the Fed, they just happen when credit bubbles or other things get out of hand. And that means that the Fed can't just cut interest rates and boost housing. This recession is very different than the early '80s".

The Bottom Line

NO, this is not the beginning of the 1982-87, Ronald Reagan, Bull Market style economy. No I'm no Bear, just a Bull (on tip toes) who remembers the 2001-2002 market. Yes, we can defy gravity and remain in Bull mode for the remainder of the year. Still, this decade will not be remembered for the great American Bull Run. This decade will be remembered as the decade for emerging market stocks.

1982 will be remember for many things like the Jackson Thriller album.



July 27, 1982 | GetBack Media

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