Premarks: The Day After.
Markets are set to open significantly higher, perhaps up 2%. Markets are as oversold now as they were in October 2008 and March 2009 so some sort of snapback is to be expected. Do not be surprised if this bounce gets sold over the next couple of days. There will need to be some sort of bottoming process. Now a few thoughts:
American companies and for what we can tell American banks are in much better condition now than they were in 2008-2009. This is important because that means what we are going through right now in not a situation where the credit markets have locked up. What we are experiencing is a loss of investor confidence due to Europe, the fall out from the debt situation along with the S&P downgrade and concerns that we may fall back into recession.
From my perch and based on what we know right now I think the following regarding these issues. I don't know about Europe. I felt a few weeks ago that they had ring fenced their problem countries. Now I'm not so sure. I think the debt situation has become something of a farce in the fact that the S&P downgrade has nothing to do in the short run with how the government pays its bills. Finally while I think we are going through a slow patch, I think the jury is still out about a recession. I know I sound like a parrot but I keep falling back on the fact that corporate America's balance sheets are in pretty good shape. In any case with a market down now approximately 16% from the highs, it is likely much of this is priced in.
Stocks have now fallen about the same percentage amount as they did back last year when May's flash crash signaled a period of market weakness. In my eyes stocks have become cheap not only on a valuation basis {earnings yield of the S&P 500 for example is now 8.2%} and by our money flow work {stocks now very oversold by our work}, but also on the support basis of dividends. The S&P 500 for example currently yields as much as the 10 year treasury. Many individual companies and dividend ETFs have dividends in the 3-4% range.
Look for markets to do some backing in filling in the days ahead. Also as I mentioned the other day that 1260 resistance level will probably be a barrier that will be hard to breach at least on the first couple of attempts to move higher. Yet I think stocks have the ability to move higher by year end. We'll stick to our 1350-1400 price target area in the S&P 500 right now based on earnings. That may seem like a pie in the sky number at this point. But even if I am off in my valuation assessment and stocks can only manage to get back to say 1250-1300 by year end then that is still 8-15% by year end. When measured by perhaps 3-4% downside from here, I think that makes this a pretty good risk/reward ratio. That is especially true when we factor in the dividends which will accrue through the rest of the year.
One of the grim realities of the modern investment world is that stocks fall of their own weight much faster today than they used to. Events that used to take weeks to play out now take a much shorter period of time. That is just what we as investors must become used to. The upshot of that is that when measured against all other investment possibilites, you are likely over time to be rewarded for understanding the volatility risk now inherent in stocks. When measured against short term bond rates that are almost zero, I think the risks for longer term investors are acceptable.
Finally back at the end of June we discussed President Obama's re-election chances. Back then we pegged his re-election chances at even money, down from 65-35% at the beginning of the year. I think we'll lower that notch now to less than 40%. The economy seems to be moving away from him and he is starting to run out of time to figure out how to fix it. It will be hard from him next year to run away from the perception that he is anti-business and harder still to run away from being the President who lost the United States' AAA credit rating.
Look for markets to do some backing in filling in the days ahead. Also as I mentioned the other day that 1260 resistance level will probably be a barrier that will be hard to breach at least on the first couple of attempts to move higher. Yet I think stocks have the ability to move higher by year end. We'll stick to our 1350-1400 price target area in the S&P 500 right now based on earnings. That may seem like a pie in the sky number at this point. But even if I am off in my valuation assessment and stocks can only manage to get back to say 1250-1300 by year end then that is still 8-15% by year end. When measured by perhaps 3-4% downside from here, I think that makes this a pretty good risk/reward ratio. That is especially true when we factor in the dividends which will accrue through the rest of the year.
One of the grim realities of the modern investment world is that stocks fall of their own weight much faster today than they used to. Events that used to take weeks to play out now take a much shorter period of time. That is just what we as investors must become used to. The upshot of that is that when measured against all other investment possibilites, you are likely over time to be rewarded for understanding the volatility risk now inherent in stocks. When measured against short term bond rates that are almost zero, I think the risks for longer term investors are acceptable.
Finally back at the end of June we discussed President Obama's re-election chances. Back then we pegged his re-election chances at even money, down from 65-35% at the beginning of the year. I think we'll lower that notch now to less than 40%. The economy seems to be moving away from him and he is starting to run out of time to figure out how to fix it. It will be hard from him next year to run away from the perception that he is anti-business and harder still to run away from being the President who lost the United States' AAA credit rating.
posted by CR English at 8:23 AM
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