The Great Debate. Turn For The Bulls.
Time now for the Bull's rebuttal. This piece was published over at Market Watch last week. One note is that I believe by backtracking on the math that the author is using $75.50 of earnings for the 2010 calender year. Current consensus for S&P earnings for next years is in the $74.75-75.00 Excerpt with my Highlights.
No reason to be spooked by October this year
By Robert Maltbie
By Robert Maltbie
LOS ANGELES (MarketWatch) -- While some might get spooked by an often-volatile October, signs are that the markets are in strong shape.
Just the facts: My indicators are as bullish as they have been since March 2003, preceding a 26% upside surge in equity averages that year. Four out of five of our market indicators are bullish and one is neutral. Let's start with the bear case:
The market is fully valued at 17 times earnings and it is too late to get in the market. But price-to-earnings is a backward-looking measure. If we use projected forward estimates, a different picture emerges. If we value the S&P 500 using 2010 estimates, which call for a 20% or greater increase in earnings, we find a more reasonable price-to-earnings ratio of 14, far below 19 where the market topped in 2007.....
Just the facts: My indicators are as bullish as they have been since March 2003, preceding a 26% upside surge in equity averages that year. Four out of five of our market indicators are bullish and one is neutral. Let's start with the bear case:
The market is fully valued at 17 times earnings and it is too late to get in the market. But price-to-earnings is a backward-looking measure. If we use projected forward estimates, a different picture emerges. If we value the S&P 500 using 2010 estimates, which call for a 20% or greater increase in earnings, we find a more reasonable price-to-earnings ratio of 14, far below 19 where the market topped in 2007.....
October is best known for spectacular market crashes. At the very least, the month's volatility can spook many investors. But many of our experts say there's good reason to remain in the market, despite whatever jitters you may have.
{The author's } "sentiment" indicators show... that volatility and possibly fear have greatly diminished. This is evidenced by the CBOE volatility which has retreated to 23 from a high of more than 80 a year ago when we were in free fall. Offsetting this is a bullish AAII pundit survey showing investment advisors are bearish, perhaps bracing for "seasonal harshness," by 39% bulls to 45% bears.{The author's} remaining indicators are all currently solidly bullish -- technical indicators, monetary data, liquidity measures and valuations. ...
A final anchor of positive support is that the Dow, the S&P and Nasdaq all have broken decisively above 200-day moving averages and held their ground. These are characteristics of a market with healthy internals, good days are better and exceed bad days and more stocks are starting to participate.
Monetary Indicators: This is our most powerful market force, also called "Don't fight the Fed." Money stock is expanding at near 8% annual rate. The real rate is higher considered against the backdrop of a deflating economy which is what we have had for nearly two years now.
The yield curve is also very steep and positive in its slope. This is a powerful 1-2 punch for the market, the fed is pumping money into the markets and economy and rates are staying low. These two factors have been important catalysts of every major bull market since 1920.
Liquidity or the directionality of money flows is another bullish sign that is just getting started. After freezing up with the cataclysmic events hitting markets over the last year, corporate M&A is rebounding, stock buybacks are returning, and money is starting to flow back into equity funds, including exchange-traded and hedge funds. Big-time mergers... are starting up again, as these and buybacks have pulsed to nearly $50 billion in September. Meanwhile, money markets have experienced a $54 billion outflow lately.
These add up to more than $100 billion in possible additional demand for equities. Offsets of insider selling and IPO issuance although increasing, are still at non-threatening or neutral levels.Last but not least, we must not forget valuations. This is also bullish both on absolute and relative levels. While we are at the onset of a new recovery in earnings, more stable indicators such as market capitalization-to-GDP and price-to-sales provide evidence of reasonably cheap valuations.
The market is at a 20% discount to GDP and relative parity to sales. In 2000, the market traded at 1.8 times GDP and the price-to-sales ratio was 2.3. It seems we've worked off a lot of excess over the last 10 years.....Stockowners are getting paid or reinvesting back in the company more than high-grade bond owners, and stockowners should see this earnings stream significantly grow over the course of he next two years or so.
Also, cash dividends on the S&P at a 2.1% tax-favored yield far exceed treasury yields out to 10 years. Cap this off with the fact that the Leading Economic Indicators index is now at 104 following four successive monthly increases.
With easy earnings comparisons and no inflation on the near term horizon {the author} expect{s} the Dow Industrials to break 10,000 in October -- barring geopolitical events.
The author of this original article is Robert Maltbie, a CFA and principal of Millennium Asset Management.
{The author's } "sentiment" indicators show... that volatility and possibly fear have greatly diminished. This is evidenced by the CBOE volatility which has retreated to 23 from a high of more than 80 a year ago when we were in free fall. Offsetting this is a bullish AAII pundit survey showing investment advisors are bearish, perhaps bracing for "seasonal harshness," by 39% bulls to 45% bears.{The author's} remaining indicators are all currently solidly bullish -- technical indicators, monetary data, liquidity measures and valuations. ...
A final anchor of positive support is that the Dow, the S&P and Nasdaq all have broken decisively above 200-day moving averages and held their ground. These are characteristics of a market with healthy internals, good days are better and exceed bad days and more stocks are starting to participate.
Monetary Indicators: This is our most powerful market force, also called "Don't fight the Fed." Money stock is expanding at near 8% annual rate. The real rate is higher considered against the backdrop of a deflating economy which is what we have had for nearly two years now.
The yield curve is also very steep and positive in its slope. This is a powerful 1-2 punch for the market, the fed is pumping money into the markets and economy and rates are staying low. These two factors have been important catalysts of every major bull market since 1920.
Liquidity or the directionality of money flows is another bullish sign that is just getting started. After freezing up with the cataclysmic events hitting markets over the last year, corporate M&A is rebounding, stock buybacks are returning, and money is starting to flow back into equity funds, including exchange-traded and hedge funds. Big-time mergers... are starting up again, as these and buybacks have pulsed to nearly $50 billion in September. Meanwhile, money markets have experienced a $54 billion outflow lately.
These add up to more than $100 billion in possible additional demand for equities. Offsets of insider selling and IPO issuance although increasing, are still at non-threatening or neutral levels.Last but not least, we must not forget valuations. This is also bullish both on absolute and relative levels. While we are at the onset of a new recovery in earnings, more stable indicators such as market capitalization-to-GDP and price-to-sales provide evidence of reasonably cheap valuations.
The market is at a 20% discount to GDP and relative parity to sales. In 2000, the market traded at 1.8 times GDP and the price-to-sales ratio was 2.3. It seems we've worked off a lot of excess over the last 10 years.....Stockowners are getting paid or reinvesting back in the company more than high-grade bond owners, and stockowners should see this earnings stream significantly grow over the course of he next two years or so.
Also, cash dividends on the S&P at a 2.1% tax-favored yield far exceed treasury yields out to 10 years. Cap this off with the fact that the Leading Economic Indicators index is now at 104 following four successive monthly increases.
With easy earnings comparisons and no inflation on the near term horizon {the author} expect{s} the Dow Industrials to break 10,000 in October -- barring geopolitical events.
The author of this original article is Robert Maltbie, a CFA and principal of Millennium Asset Management.
**Long ETFs related to the Dow Jones Industrial Average, S&P 500, Nasdaq and Nasdaq 100 for client accounts.
posted by CR English at 6:09 AM
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