Contact Us Disclosures Blog
Make an Appointment Contact Us Podcast Blog
Market Commentary Audio Archives Book Shelf InvestAbility Center

Could The Worst Be Over?

March 20, 2009 – 1:52 pm

Two weeks of a strong Bear Market rally is pulling people back into the market. This move is too fast in too short of a time therefore we will likely see a pullback. After that pullback, if and when we get it, would be a much better time to buy. Please note that of course that may not happen. However, we have had 20% moves up from bottoms in this Bear Market only to have them wiped out. At some point we will see the ultimate bottom. Is the recent low that point? 

At the risk of being totally wrong I am going to say we have hit the ‘real bottom’ two weeks ago. We will now test that bottom at least once and maybe more than once, but I think it just might hold this time. Many experts have called a bottom at anywhere from 5,500 to 6,000 with one guy way out on the fringe and saying the DOW will go to 700. That’s not happening. 

My reasoning for saying we have hit the ultimate bottom is based on facts. However, my interpretations of these facts could be wrong. In past newsletters I have consistently stated that we need to watch real estate. It has started to improve. This week the news coming out of the Fed meeting means that they are aggressively pushing mortgage rates down; that will help real estate. Don’t mistake me. Foreclosures are still rising and prices falling but sales are picking up. 

A few hints in the economic numbers are suggesting the worst just might be over. Starts for new homes rose 22% in February. PPI and CPI, the inflation gauges are still well contained. The Fed is not worrying about inflation. In fact they are trying to re-inflate prices. Leading economic indicators were down .4% in February after being up .1% in January. That suggests a very week economy but no longer in free fall; it’s stabilizing. Since stock prices are a component of the leading economic indicators and February was a very bad month for stocks maybe the overall number would not have been down if you removed the stock market influence. Think about our recent rally-if it holds, what might it do to the leading economic indicator next month? 

Stock prices are very low with the S&P 500 P/E ratio sitting at around 11. It was as low as 10 a couple weeks ago. Historically the average ranges between 15 and 19. It has been as low as 6 to 8 as an extreme low. So of course the market could go lower. However, fear has subsided and there are still trillions of dollars sitting in money market funds earning next to nothing in interest income. Dividends, even though many of them are being cut (24% so far this year for the S&P 500), are high. 

It is very difficult to pick a bottom and is usually a fool’s game, but since I get many requests for my opinion, now you have it. The high probability of a pullback means that it will be time to exit any short positions you might have left and to start buying stocks once again during that pullback. The buying should be focused on material, tech and energy stocks. It should be in stocks with high cash reserves and low debt, companies with transparent earnings going forward and finally stocks that are low priced in relationship to those earnings. There are many stocks that meet these requirements. Simply put, buy stocks at less than market P/E ratios that are growing earnings. 

We are waiting for a pullback before we get aggressive. We bought only one stock and sold a few in the last two weeks. We will be buying in the weeks ahead on weakness in the market. 


Post a Comment