Monday, January 14, 2008

Financial Update

Sorry I haven't posted anything about the markets in a while. It has been quite brutal on Wall Street. 2008 is off to one of the worst starts ever for the stock market. I was actually kind of depressed about it, until this morning, when something hit me.

This is one of the greatest buying opportunities of all time, especially people in their younger years.

Let me tell you why.

1. Stocks have pulled back over 10% since their peak in October.

2. The price to earnings ratio on the S&P 500 companies is at about a mean of 13.8 (cheapest in 5 years).

3. There has been SOOOOO much negativity this past year, between the credit crisis and the housing decline. GDP growth is slowing, thus fears of recession are extremely high. All of that is now priced in. How much worse can things get? People are already expecting the worse. By the time we realize it, the worst will be over. The market is always forward looking.

4. The mean duration of a recession is only 12 months.

5. Do you think the tech story is going away? Do you think Steve Jobs and others will stop innovating? No way.

6. China and India keep growing, as does a lot of the rest of the world. Companies that have international exposure are reaping nice profits because of the weak dollars (total sales to other countries become a greater absolute # of american dollars compared to previous years because of the exchange rate).

7. The financials companies are in the process of bottoming. They are officially in "bear market" territory (20% decline in prices). If anyone has been paying close attention, the past few weeks, even when bad news comes out (e.g., Bear Strearns has another $11 billion in write-downs) it doesn't send the stock prices falling as much. In fact, financials have been up the past few days, and were even up on Friday when the Dow was down about 250 points.

Things that will also help the financials bottom:

A. A lot of mergers are taking place in the financial world. Bank of America is buying out Countrywide financial. JP Morgan is buying Washington Mutual. Citigroup keeps getting money from Dubai investors. Expect continued mergers and influxes of money.
B. The fed is going to cut interest rates again very soon.

8. Even "bearish" market strategists who are predicting a bear market, say we may encounter another decline of 8-10% from these levels, which will put us into official bear market territory (i.e., 20% decline from recent highs). The consensus among the experts is about a 50-50 chance of a bear market. Now, listen, if you have 5+ years to invest, I cannot thing of a better way to make some money. You know that you have the risk of losing about 10% more to the downside. But, what is the upside? We have already gone through the "correction phase" (10% decline from peak, which is a healthy thing for bull markets). Here is the upside. Look at the chart at the S&P 500 from the past 5 years. You are seeing, on average, about 15% growth per year. Over 5+ years, that 75% up. Remember, the doomsday scenario is only 10% more down. Below it is the chart of the S&P since 1955. What a ride upward!! Sounds like a no-brainer to me.

Plus, my boy at, Sanjoy Ghose, still has a long-term buy signal with 5 of 5 positive long-term indicators for the market.


1. Treasury Yield Slope (%) = +1.31 +

2. Fwd PE Ratio = 15.15 +

3. Put/Call Ratio (PCR) = 0.93 +

4. Real GDP (Annual % growth) = 4.9 +

5. Core CPI (Annual % growth) = 2.3 +


CURRENT ADVICE (from Sanjoy):

1. 5 out of 5 indicators are positive. Long Term Trend Signal (LTTS), is a BUY. Outlook is BULLISH, and we remain FULLY INVESTED in the stock market.

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