Thoughts on Fundamentals/ Sentiment/ Money Flows/ Valuation

We discussed yesterday some of the negatives driving stocks. With markets now having given up most of their gains for the year, it is likely that much of this negative news has been discounted in current prices. Today in a sort of quick note/thought process are my thoughts on where on where we currently stand.

Fundamentals:

Bonds yields at historic lows are permitting a massive restructuring of both corporate and individual balance sheets. As a result American corporations are in pretty good shape. Individuals also have the opportunity to take advantage of this. I'm in the early stages of refinancing my mortgage and rates are low enough that it looks like I might be able to save around $800 a month. Folks that's real money and it's being magnified all around the country.

Corporate America is very lean and with the above mentioned strong balance sheets places US companies in a great position to build their business either by reinvestment, restructuring or mergers.  Strong balance sheets also equate to the potential for strong dividend growth which we have also seen this year.

US economy is growing, albeit at a slower rate than most of us would like to see.  GDP growth will likely be around 2% this year.   

Prices of oil and other commodities has come down in the past several months.  This is a net positive for consumers. 

Disappointing economic data, especially that regarding jobs means Obama administration likely is hitting reelection panic button. Political data shows that voters perception about the economy is usually set in the summer months leading up to the election.  Bad economic news could be fatal to the President's chances.  Indeed Intrade Markets now are giving him only about a 54% probability of winning in November.  This likely means the focus  between now and the fall will be on the economy and jobs.  Look for a more conciliatory stance out of the Administration regarding taxes and the budget.  Also look for QE3.  There is now higher potential look for sysynchronized monetary policty between China, Japan, Europe and in the U.S.

Great things are happening under the hood regarding innovation and development in business.  See for example what Spacex  is doing.  Look at the developments in energy, electric cars, green technology, healthcare and technology.  

Sentiment:

AAII investor sentiment survey approaches numbers that typically marks some sort of a bottom in a current cycle.  

Investors have pulled money from U.S. equity funds every month since April 2011, the longest streak of outflows since Washington-based trade group Investment Company Institute began tracking the data in 1984. They took out $7.2 billion during the five days ended May 23 after $178 billion of withdrawals in the previous 12 months, ICI data show.  {Source:  Bloomberg.com}

Media and television coverage of economic news is currently skewed very negative.

Money Flows:

All our indicators are showing oversold readings of the type that is usually indicative of some sort of bounce in prices.

The percentage of stocks trading above their 200 day moving average is approaching 40% which is a level from which stocks have the potential to rally.

The percentage of stocks trading above their 50 day moving average is around 20% and is already at a level from which stocks typically rally. 

Valuation: 

{Note some of this Data comes from this excellent article from Bloomberg:  S*P 500 Valuation Slips Below 11. }

The S&P 500 is trading at 12.9 times profits in the last 12 months, compared with 15.9 times in February 2011, data compiled by Bloomberg show.

Earnings in the S&P 500 are forecast to reach a record $105.81 a share in 2012 and climb 13 percent in 2013, according to analyst estimates compiled by Bloomberg. Companies in the index have boosted profits for more than two years.  {Note:  My own internal S&P 500 estimate uses 103.75.}

Based on last night's S&P 500 close of 1286, the index trades: 

12.40 times my 2012 estimate and an 8% earnings yield. 

12.16 times current consensus 2012 estimates and an 8.2% earnings yield.

Stocks still have the potential to end 2012 in a range between 1450-1550 with 1475 my midrange target for year end 2012.  That is a nearly 15% price return potential from these levels.

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