From the Desk of
The Dow rallied +2,815 points from the August 2010 lows to the end of July in 2011. At that point the debt ceiling headlines and the near shutdown of the government caused a new bear market and the Dow declined from 12,750 in late July to 10,404 on October 4th for a drop of -2,346 points. The rally that began in the fall of 2010 was erased by politics.
The politics in the U.S. over the debt ceiling caused the USA to undergo its first S&P downgrade from AAA status ever. The bond market blinked and then came right back. The U.S. is still the safe haven for global investors of all types.
The European debt crisis blossomed into bailouts for Portugal, Ireland and Greece. The political circus surrounding Greece prompted 13 EU summit meetings over the last two years and they still got it wrong. The final bailout agreement was nearly shredded when George Papandreou got the bright idea to hold a public vote at the same time citizens were burning cars in the streets in protest of the austerity. Obviously he was not the sharpest tool in the shed and it cost him his job.
Italy saw what was happening to Greece and dumped their prime minister in an effort to get rid of the excess spending and avoid a similar fate. Economic expert Mario Monti has been charged with putting together a temporary coalition government that rescues the country from a the same fate as Greece.
Despite all these events the markets have returned to their highs because the USA is doing OK. Growth in the U.S. is slow but it is growing. The GDP at +2.46% in Q3 is far better than the 0.36% in Q1. Analysts are now upgrading Q4 estimates to more than +3%. Slow and steady wins the race and the threat of a new recession has declined significantly.
Corporate earnings are still strong with Q3 earnings growth at more than 17% for S&P-500 companies. That is +17% earnings growth in an environment with 9% unemployment. When the economy picks up speed the profits are going to be pouring in because corporations have slimmed down to lean, mean, profit producing machines. Earnings are expected to increase another 11.5% in 2012 to $106 on the S&P even if the slow growth continues.
At the current market levels stocks are cheap. The S&P is trading at a PE of 11.8 and that is very undervalued compared to a normal PE of 15-18. Fundamentals do matter and undervalued stocks with rising earnings will win out every time in the long run.
How many times have you heard about the tons of cash on the sidelines or the trillion dollars in corporate accounts just waiting for the economy to pickup so they can put it to work? That cash is real. The volatility in the market and the economy has caused corporations to slow spending and investors to move to the sidelines to safely wait for the string of political events to fade away.
They will fade away. Greece, Italy and even Spain will eventually get what they need to put their house in order. They have to because the EU can't afford to have the union break up. They have too much invested already and the alternative would be a disaster. They don't want to bail out their wayward offspring while the world watches but they have no choice.
As each problem in the Euro Zone is resolved the markets will celebrate. It may take time for things to return to "normal" but the problems will eventually fade away. For those countries it will mean years of austerity but for the rest of the world the storm clouds will dissipate and normal conditions will return. The resulting Euro Zone will be fiscally stronger and that will benefit everyone.
I see 2012 as a great year for investors. Fundamentals do matter and the earnings and economics in the U.S. are improving weekly. Once unemployment begins to trend lower we will see investors coming back into the market and stocks will rise again. We will see new highs and it will be an exciting time to be in the market.
Every catastrophe over the last 15 years was a crisis of major proportions at the time. The Russian debt default in 1998, Y2K, the bursting of the Internet bubble, 9/11, the Great Recession and the Flash Crash. Every one of those events is only a memory now. Investors have made a lot of money as the market recovered from each market plunge. Nobody ever guarantees the ride will be smooth. There are always bumps in the road. We need to accept the bumps and look forward to the rebounds.
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We are adding a new publication to the End of Year special this year. Option Investor and Premier Investor have gravitated over the years to shorter term trades. I am launching a different type of newsletter for longer term investors that don't want to be managing trades every day. The types of positions in the Ultimate Investor could last from weeks to months depending on the position. These will be lower volatility "investments" rather than trades.
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An example would be a long term call option on Hewlett Packard when they fired their CEO and the stock dropped sharply. The trigger point was when they hired Meg Whitman to turn the company around. That would be a 3-6 month position. Another example would have been taking a position in Yahoo when Carol Bartz was fired and the company put up for sale. We will also take positions in stocks ripe for a takeover as we have seen in the oil sector with Global Industries (GLBL) and Brigham Exploration (BEXP). By limiting our positions to 3-5 per month we can always be ready to respond when situations appear.
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