So Many Analogies

Every time the U.S. employment rate has risen by at least 0.3% in a month, as it did in December, a recession has occurred.

Prior to the onset of a recession, there's typically at least a 25% one-year rise in weekly unemployment claims. The increase in claims in December was less than 7%.

The average decline in the S&P 500 from a pre-recession peak to a trough since 1945 has been 25%, just a few percent more than the index has lost from the 2007 peak to its intraday low last Wednesday. So maybe the market has already discounted a recession?

Every one of the 23 times since 1987 that the weekly AAII poll has shown bears over bulls by a 2 to 1 ratio, the market was up 12 months later, by an average of 21%.

So, where does that leave us? We have conflicting signals. The positive is that since the one day reversal last week and the 600 point swing on the Dow, we have been moving higher. Most pundits talk of the recovery as short covering, a bear market bounce, nothing to get excited about. This is classic wall of worry stuff. Even capitalist-minded IBD (Investors Business Daily) can't even come out and say that they are watching for a follow through rally, and that today would have been Day #5 of a rally attempt. If IBD is skeptical, that tells us something.

Good Luck.

Fed Model: The Market is 51% undervalued!

Ok folks, with today's plunging 10 Year Treasury Bond down to the 3.31% level, I again worked the levers on the Fed Model. With the S&P at 1300, for its earnings yield to approach the same yield of the 10 Year Treasury, the S&P 500 price would have to be 2530. This is also based on today's estimated operating earnings of the S&P 500 over the next four quarters of $83.70. A 2530 level would also mean a 95% gain from current levels. Put that in your pipe and think about it. Good luck.

Stock Market Swoons Lead To....

Big gains. My friends at the Market Analysis, Research and Education Group (MARE), a unit of Fidelity Management & Research Co, sent me a report that compared the five worst Januaries since 1926. The average total return for these five Januaries was -6.8% as measured by the S&P 500. However, subsequent to the five worst January returns since 1926, the stock market generally recovered to post positive returns 12 months later.

The average one year return in the subsequent twelve months was 12.3%, while the two year total return was 26.0%. There was one two year return with a -8.1% result, which happened during the WWII years in 1939 and 1940. Recall, Germany invaded Poland in September of 1939, and not surprisingly, the market was already discounting global dislocations earlier that year! Funny how the market works, huh?!!

Bottom line, your goals and objectives should not have changed at any point in the last few days due to market fluctuations. If you think they have, it is only because you are reacting to fear and greed.

VIX Reaching Panic Levels

As noted last week, we've been watching for signs of capitulation; margin calls, bear market headlines, special one hour television programs dedicated to bear markets, magazine headlines, the whole shebang, and we are getting it and then some.

If you are a long term investor, seeking to grow your wealth, hoping to beat inflation and taxes, the way to success is through equities. Unique buying opportunities come around every now and then, and today is one of them. It's funny and perverse in the investment business, folks think about selling stocks after they have declined 20%, but when searching for bargains in the "real world," they wait for the after Christmas sales and other so-called big mark down events, but when it comes to the stock market, they buy when it's high and sell low. Perverse, huh?!?!

The time is now to get involved, if you have cash, you deploy it, thinking in 3, 5, or 10 years, that your stocks will perform better than bonds and cash. Don't forget, the market sometimes likes to re-visit past lows and put in a double bottom, so watch closely to see how the market trades and we don't want it to get ahead of itself. History of market bottoms tells us that they usually re-test lows, and then expand from there. So this mornings lows might be re-visited. Don't forget, you can't pick the exact bottom, so you wade in, add systematically, and as we put in a bottom over the next few months, you will look magnificent over the next few years. Good luck.

Guns are a Blazin

We finally had some capitulation today. The market rolled over, all ten S&P sectors were down greater than 1% today. The VIX, our trusty measure of volatility, approached the 30% level. This is what we have been waiting for. If you get a big down open tomorrow, and then a monster rally, you need to buy it. This strategy has worked in the past and should work again. Please review the chart above. The VIX is finally approaching 30, we're not there yet, but certainly today's trade scared a lot of people. That's what creates a bottom. Good Luck.

If You Sell Stocks, What Do You Do With The Money?

Ok, so the big question is: if you sell your equities, where do you go with the money? Think again in the big picture: stocks, bonds, or cash?? I think sooner or later, folks will realize the stock market offers the best long term value for your money. If your goal is to beat taxes and inflation, by default, stocks win.

Ok, so the asset allocation decision regarding where to go if you sell your stocks, has me pondering the Fed Valuation Model. Click here for what it is.

I also went to the McGraw Hill S&P site to determine the next four quarters earnings expectations. As reported S&P earnings forecasted for the next 12 months = $83.70. Therefore, with the S&P 500 currently trading at 1371, the market PE ratio = 16.37. The Fed Model, however, reverses the PE, and it becomes an earnings yield calculation, a E/P if you will. The calc is as follows: 83.7 / 1371 = 6.1%

It's straight forward from here, you compare the earnings yield of the S&P 500 to the 10 Year Treasury Yield, which stands today at 3.66%. Therefore, stocks are vastly undervalued compared to bonds. You can buy the 10 Year Treasury and lock in 3.66% today, or you can step out on the risk curve, and embrace the volatility of the stock market, in the hope you achieve something closer to 6% or better returns from equities. My suspicion is that over the next ten years, an investor will do better in stocks versus bonds. The key, you don't blink when things get tough, as they are right now, and consider investing a marathon and not a sprint. Good luck.

You Can Run, & Where to Hide?

The S&P 500 is off -5.4% YTD, and the Nasdaq Comp is -8.8% YTD. The healthcare and biotech sectors are holding up well. IHF (Healthcare Providers) is flat ytd, as is PBE (Biotech). What does this mean? It means investors who must hold equities have been rotating into defensive sectors. However, bear markets have a nasty way of crunching most, if not all stocks and sectors. The chart of IHF is OK for now, but worth watching extremely closely.

Lastly, anyone really know where the saying, "You can run, but you can't hide" came from?

AAII Survey

The news is coming fast and furious these days, and as I type, we are experiencing a 10-1 day, meaning we have 10 declining stocks for every one advancing issue on the market today. The down volume on Nasdaq is at 93% versus up volume of 7% as I type! I can't seem to find any "news" regarding the negative PPI report today (positive for inflation), as the market is completely obsessed with weak retail sales and other "bearish" news items.

What is getting discounted is the "bad economic news." The evidence? The weekly American Association of Individual Investors (AAII) Bulls/Bears Survey. As of Jan 11, 2008, the percentage of "Bears" = 58.9% and the percentage of "Bulls" = 19.6%. The typical extreme pessimism zone starts when the bulls only number approx 49%, and we are awfully far away from that number. This is a contrary indicator, meaning we are far out-numbered by the bears, and therefore, the market has discounted a recession, or other negative events. Perversely, since most are now bearish, this presumes most investors have already sold their equity positions, and by definition, they are now bearish, and consequently have sold equities, are holding cash, or have gone short. The contrarian idea means that the next logical move is for bears to slowly become bullish again, and by definition, will have to buy back, or cover their shorts, and the market will turn and begin to climb again.

Ned Davis Research did a study on this data set, and concluded anytime bullish reading are below 49%, the average annual gain of the S&P 500 is 17.2% twelve months later.

In addition, the levels of bullishness/bearishness indicated in this survey were most similar 17 years ago. They show us that investors haven't been this bearish since the 1990/1991 recession and Gulf War period.

20 Tips for a Positive New Year

Jon Gordon, publisher of a terrific book called "The Energy Bus" - sends a weekly email that I typically share with my colleagues. It is packed with good ideas, but doesn't drone on and on about feel good/positive thinking stories. It is on point and a quick read. Click here for his 20 tips for a positive year. This guy makes sense, and he has solid ideas for both your work AND home environment. I hope you like his Tips for 2008!

Buy the Dips on the QQQQ

The chart above says it all. In our nearly five year bull market, every time the Nasdaq 100 tested the 50 week average, or dipped temporarily below it, it was a terrific buying opportunity. The question today: Is this time different? As we roll into the new year, there is plenty of fear and skepticism building, as evidenced by the put/call ratio, vix level, newsletter sentiment, etc etc....and history has shown that it usually rewards investors who buy when others are running for the exits. Let's see if history repeats itself. Note, the spring 2006 decline was scary, but by the time you acted, it was probably too late to sell. We could yet have a sudden 5 or 10% more downside, but we could easily reverse quickly and sprint higher once again. So, how are you going to play it? Good luck.

The Demand for Gold

Sean Brodrick writes today in Money and Markets about why he thinks the price of gold will trade higher this year. Thankfully, he doesn't address the common notions of inflation and a weak dollar as justification for gold trading higher. I think the media is sometimes wrong when attempting to describe the precious metal sector in this fashion. What Sean does well here, is to simply assess the supply and demand attributes to the gold bullion market. The key point to focus on, and refreshing not to belabor the intrinsic demand from India, China, and other emerging markets (again, we get tired of hearing that), is the demand generated by "investment" products per se, and not individuals searching for jewelry or coins. Here's the quote:

"Force #2: New Demand From Gold Investment Vehicles. Worldwide demand for gold as an investment rose to 138 metric tonnes in the third quarter, up a stunning 618% from the 19.2 tonnes in the year-earlier period!

Exchange-traded funds that hold physical gold — GLD and IAU in the U.S., GOLD in Australia, GLD in Johannesburg, GBS in France and Britain — held approximately 741 metric tonnes of gold at the end of November — up from just 39.4 tonnes in 2003.

The huge rush of gold buying by the ETFs is helping drive the market — the easier it is for investors to buy gold, the more they buy, and the higher the price goes."

The relative change of demand for gold by investors during the period 2003 to 2007 is stunning! We're talking a change from 39 metric tonnes to the tune if 741. WOW! Now that's a trend that could easily continue for some time, especially as demand for ETFs continues to explode. In addition, in a world of flattening capital market yields, investors will continue to seek alternative investment ideas as opposed to traditional allocations to stocks, bonds, and cash. This will be fun to witness as the year unfolds. Stay tuned.