Market PE Revisited

Today's chart comes from Chart of the Day and revisits the market's Price to Earnings Ratio, This is what they say:

"{This Chart} illustrates how the recent rise in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). Notice how investors were willing to pay much more for one dollar of earnings during the dot-com boom, the dot-com bust and financial crisis. Currently, with 94% of US corporations having reported for Q4 2010, the PE ratio stands at 17 which is a relatively low level when compared to the past two decades."

My thoughts: I can't be sure but I'm guessing this chart information is based on a trailing year's PE on the market. Current S&P 500 estimates for 2011 are ranging between $92-$94 on the index. That means that the S&P is currently trading with about a 14 Price to Earnings ratio on these forward earnings. Assuming these earnings estimates hold and are not revised down and also assuming that the market would trade at the same level of valuation mentioned above {17 times trailing 2011 estimates}, then on this analysis the market as represented by the S&P 500 could be worth somewhere in the 1500 range 12-18 months out. I'm not convinced we'll get to that point by the end of next February but I still think there is the potential for stocks to trade between 1,350-1,400 by the end of this year. I also think that all things being equal, that stocks have the potential to trade around the 1,500 level by year end 2012. Are Stocks Cheap {Part II}

Given that we are at 1,320 on the S&P right now there are only a few possibilities that can occur. The first is that my valuation estimates are too conservative for this year and need to be revised higher. The second is that since stocks have been in a sustained rally since Labor Day and are up just under 5% for the year, that we are close to a market ceiling for awhile and some sort of pause or retracement is likely at this point. Finally it could also be that both of the above are correct. That is that stocks could rest for a bit now {remember that securities can correct by price as well as time}, find a level of equilibrium and then rally hard at some point later in the year.

It is too soon to say which of these scenarios will happen. Also the analysis above assumes that our economy continues to grow between a 2-4% rate of GDP this year. All bets are off if the economy shows evidence of weakening or some outside event {Egypt, Libya or possibility Saudi Arabia} washes aboard sending all of our analysis up for grabs.

That being said I have raised a bit more cash in risk appropriate accounts. Namely I have pieced off small amounts of energy ETFs. This is more of a rebalancing as these positions have grown too large relative to their account percentage targets. Some of these have rallied much more than the market since the recent rally began.

I haven't redeployed that cash yet and am unlikely to do so until my indicators show us that we are in a more favorable risk/reward situation for that money. In some of our more aggressive strategies I may use that cash on an opportunistic basis but I am content for now to let cash set for the most part on the sidelines.

Link: Chart of the Day: Market PE

*Long ETFs related to the S&P 500 in client and personal accounts.

an tSionna 02.25.11 {A Mark Of Sorts}

Please double-click on this chart to open it up.

*Long ETFs related to the S&P 500 in client and personal accounts.

Correction Protection.

Doug Kass is a hedge fund manager, a columnist for the Street.com and an occasional commentator for CNBC's "Fast Money" program.  Last night he made an appearance on that show with part of his playbook for correction protection.  These are.

Maintain above-average cash positions:  Be less concerned with a return on capital and be more concened with a return of capital.

Buy protection:  For those so inclined option positions as a hedge are still cheap even with the events of the past several weeks.

Diversify:  For most of us it is probably not wise to have more than 15% in any one S&P 500 sector.

Fundamentals matter, not price action on stocks:  Avoid momentum or high-octane names.  He used Netflix {NFLX} and a few others as an example of this.

Here is a link to the CNBC segment:  Kass: Fast Money

*Long ETFs related to the S&P 500 in client and personal accounts.  No direct positions in NFLX but it is a componenet of several ETFs we own in client and personal accounts.

an tSionna {02.23.11} Market Correction

*Long ETFs related to the S&P 500 in client accounts.

Posting Schedule

I will be out through Tuesday and will not be posting until Wednesday of next week.

Institutional Investors Bullish-Very Bullish

From 24/7Wall Street. {I'll have more to say about in the future.Highlights mine.}

"The BofA Merrill Lynch Survey of Fund Managers comes out once a month. The February reports says that institutional money managers are more bullish about equities than at any time since the poll started in April 2001.  “A net 67 percent of asset allocators say that they are overweight global equities. This represents a significant further increase from January and December when a net 55 and 40 percent were overweight the asset class, respectively.” Emerging market investments dropped.

The DJIA is up 6% so far this year. Japan’s market is higher as are a number of markets in northern Europe and South America. No large money manager wants to miss the chance to post strong first quarter results

There is a strong belief that as markets begin to increase institutions take large positions in equities and then abandon them to individual investors. The value of equities then begins to fall. The small investors take most of the losses. Things may be different this time around. The belief that stocks will continue to rise is widespread.  The value of equities could go up another 25% this year and continue the extraordinary run which began in March 2009. Or, there could be a sharp sell-off. Institutions seem ready to stay the course in equities and take the risk the market has not topped. If investing in the stock market is just gambling as some people say, the smart money has bet on another year of extraordinary improvement."

Link: Global Investors Bullish

*Long ETFs related to the Dow Jones Industrial Average in certain client accounts.  Long ETFs related to emerging markets in certain client and personal accounts.

an tSionna {02.17.11} Market Doubles

*Long ETFs related to the S&P 500 in client accounts.

an tSionna {02.16.11} KBE

KBE is a bank stock ETF.  Banks have performed well since late November and also since the beginning of the year.  Fundamentally banks are repairing their balance sheets and still have the government behind them regarding both regulation and the yield curve.  Banks should also start paying more in dividends over the next couple of years which could support an ETF such as this.

*Long KBE in client accounts.  Long certain other financial ETFs in individual & certain client accounts as well. 

an tSionna {2.15.11}-GLD

A chart of the gold ETF GLD.  Gold has underperformed the markets this year after being one of the best asset classes over the past several years.  A lot of debate amongst the chattering classes about what all this means.  To us it's pretty simple.  Right now GLD is locked in a trading range.  We'll take our cues about how it reacts as it kisses either the lower or upper bands of the range.  Right now it looks neutral by our work which could of course change if any of these ranges are violated.

Gold is a different asset class and there are reasons to own it as a hedge and not only for appreciation. 

*Long GLD in certain client accounts.

an tSionna 02.14.11

We're going to spend some time over the next couple of weeks looking at different charts to see what they may be telling us.  Today we'll look at the S&P 500 which has been on a quiet march north.  Nothing spectacular on any given day, but 3/10's of a percent on average every day over time adds up. 

What will change this in my opinion is some news event that catches the crowd way to far on the bullish side forcing them in a very short to turn bearish and head for the exits.  Egypt looked like that candidate a few weeks ago but markets {at least here}seemed to discard that as a problem after a few days.  For now we just drip higher.

*Long ETFs related to the S&P 500 in client accounts.

Happy Valentine's Day!

Standard of Living

This article in USA Today from last week is an interesting read.

Our standard of living Is it better than ever?  Absolutely, but tough times have us thinking otherwise

By Dennis Cauchon  USA TODAY  {Excerpt:  Highlights mine.}

When Richard Steckel was a kid, he had friends whose family put their refrigerator in the living room. So great was the status of a new, electrified icebox that it had to be displayed for all to see. "Who doesn't have a refrigerator today?" asks Steckel, 66, an Ohio State University economist. "People grossly underestimate our progress over time because of technology."

The nation is recovering from its worst recession in decades and the unemployment rate is above 9%. Yet the nation's standard of living — by almost any standard — is better than ever, or close to it.......  

....What's different today — what stretches the ordinary imagination — is how much richer we've become than at any time in the past. USA TODAY compared life today to 1980 to show how life has changed since Ronald Reagan was elected president and during the adulthood of Baby Boomers, the 77 million born from 1946 through 1964. The average annual income was $24,079 per person in 1980 in inflation-adjusted dollars, according to Bureau of Economic Analysis data. Last year, it was $40,454 per person.

Not only has income grown, what's less obvious is how much better a lifestyle can be bought for the same amount of money....In 1980, 2.5 gigabytes of computer power cost $214,000 and consumed a room. Today, that capacity sells for $7 in a pinky-sized flash drive at Best Buy.  The wealth of the computer era and other innovations have made this generation so prosperous that it's hard to remember what life was like not long ago.  A typical new house today has 2,400 square feet and fewer people in it than the typical 1,700-square-foot new home of 1980. Today, Americans fly twice as many miles as in 1980 and own more vehicles than the nation has drivers.  Yet the recession has changed our attitudes and expectations so many Americans don't feel as rich as they were several years ago or when they grew up.

"People earning $200,000 a year are feeling and behaving like those with half that income," says Scott Spiker, chief executive of First Command Financial Services, an investment adviser that surveys consumer attitudes.  Americans appear to have made a permanent adjustment toward frugality, Spiker says. "People are making a standard of living change, saying they don't have to live so far on the edge anymore," he says.

Automakers see the change.

Buyers are purchasing smaller cars to save money, then spending more on safety upgrades, entertainment systems and global positioning satellite systems, says Jeff Schuster, forecasting director for J.D. Power and Associates, an automotive research firm....."The buyer is saying, 'Maybe I don't need all the space, but I want the amenities.' "

The shift to luxuries — which soon become everyday items — has been helped by a decline in the cost of food and clothing, partly the result of cheaper production overseas and discount retailers such as Wal-Mart.  High unemployment and increased inequality has led to the perception that living standards aren't progressing as they should, Steckel says. "It doesn't mean much that you can buy a $10 shirt at Wal-Mart if you don't have a job," he says.  Still, the average person spends about $1,000 a year on clothes today, the same as in 1980, even though incomes are higher and shirts cheaper.   With basic items inexpensive, consumers have turned the flow of money to their quality of life: housing, health care and recreation. Americans spent $5,438 per person on health care last year, up from $1,796 in 1980, after adjusting for inflation.

The spending has paid off.

A 50-year-old can expect to live three years longer than a person of that age in 1980. The chance of surviving cancer is way up; pollution is way down. Crime has fallen by two-thirds.  Steckel, the economist, says our living standard has improved far more than economic numbers reveal. "Imagine what people would have once paid for aspirin? An enormous sum. Today, it's super-cheap, as are so many products," he says. 

Every year, Steckel asks his students how many expect to have a standard of living equal to their parents. Many students predict they'll be worse off.

To imagine what living standards were not long ago here and are in much of the world, Steckel suggests they turn off their electricity. To really understand, he says, shut off the plumbing.

Link:   Standard of Living.

Snow Pictures

This is what I've been dealing with the last couple of days.  This will be old hat to those of you living in the Chicago area.  Those of you in other parts of the country can see what we've been dealing with here.  I figure between moving the snow in the driveway, shoveling off the roof and the back deck, all of us have moved between 2-4 tons of snow!  We've been open all this time but between work and the snow there's been no time to post.  I'm out next week on my annual Florida client visit {funnny how that happens only in the winter!} so posting may be light.  By the way you don't shovel a snow of this depth.  You basically move it around.

Snowed In!!!!

I will point out that Lumen Capital Management is one of the few companies in the Chicagoland region working today!  Having said that we're going to be in and out trying to dig ourselves out of this mess.  We have 18 inches here by my count with more on the way.  There's what I think is a 7 foot drift in my backyard.

Will try to send along some photos for you all located in warmer climes.  Will make you glad you are not here!

May Be A Bit Busy

We may be a bit out of the loop the next couple of days.

BLIZZARD WARNING FROM 3 PM TUESDAY TO 4 PM WEDNESDAY. Light snow flurries from a wintry overcast much of the day. NE winds strengthen 14 to 28 mph. Gusts topping 30 mph before evening. Steady storm snowfall spreads in from the south mid and late afternoon. Full-blown blizzard this evening and tonight. Serious blowing/drifting as gusts build to 40-50 mph. Bursts of thunder-snow and periods with less than a quarter mile visibility. Blizzard or near blizzard conditions persist into Wednesday morning. Totals: 14-22 inches by Wednesday afternoon. 

Some of the weather scenarios say we could get as much as 3 feet of snow in the next 24 hours!  We'll see. 

an tSionna {2.01.11}

*Long ETFs related to the S&P 500 in client accounts.

{Remember you can double click on this chart to make it larger and easier to read!}