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In Search of a Bottom

September 23, 2011 – 5:01 pm

Last week we had 5 days in a row where stock prices rose followed by this week’s two days that erased those gains. Actually those gains were erased in less than 3 hours over that two day period. The catalyst was Bernanke when he announced his ‘operation twist’ late on Wednesday. All that did was twist investors into knots as they sold off sharply. It wasn’t the program of swapping out short term for long term U.S. debt, it was what he said, indicating that the risk to economies weakening has increased. He hinted that Europe is the problem. He did not mention Europe by name but it seemed obvious to most people watching the situation.

Therefore, Bernanke should not get all the blame; more of it should go to the Europeans. This week they dithered and dodged, pushing off decisions until next week on whether or not to give Greece their next load of cash. Greece has dragged their feet in not implementing their reforms with any sense of urgency and between the two you have a persistent problem.

The bright spot is that corporations around the world are in very good shape. Earnings are still rising, though maybe not as fast, and balance sheets are in extremely good shape. As stock prices fall they become extreme bargains. History has taught us as recently as in 2009 that stocks begin to move up when the world seems to be in crisis. Stocks prices are much cheaper now than they were then based on any type of metric you wish to apply. Yes, I realize the DOW is much higher in nominal numbers but stocks are valued based on earnings and they have dramatically increased since the recession. Today the P/E of the market is 10 to 12 where as just before the recession it was 15 to 17. A normal P/E is around 15 to 16.

Fear is dominant in everyone’s thinking and when that happens stock prices find a bottom.

Good Trading
Steve Peasley

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