Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Buyer Beware: The Bottom Is Not Yet In

By

Checking your emotions at the door essential in this market.

PrintPRINT
Stocks are on a tear again today hitting new recovery highs, as passionately bearish investors just tear their hair out. And that emotional quality is the subject of this article.

In philosophy, "I think, therefore I am" is a truism. In investing, however, it seems that many investors subscribe to the variation, "I feel, therefore I invest." And therein lies the subjective rub that imposes the belief of what "should be" and alters the objective view of "what is."

Taking the current situation, what should be, is captured in the following rather simple (but elegant) fair value valuation table:

15 times $70 S&P 500 operating earnings for the next 12 months (mid 2010) = 1050

1050 minus a reasonably generous discount factor of 10% = 945

As I noted in my blog posting on Tuesday, "…one can debate the inputs and the appropriate discounting time period" however "…Only those with the rosiest of glasses can envision earnings and P/Es greater than those listed above." Well, if valuation levels (based on today's prices and/or assuming a more conservative discount factor) are more than a touch on the rich side, what could explain the new-found enthusiasm of the previously risk-averse investors? One answer can be found in the return of animal spirits via the hedge-fund world.
For example, consider the following 2 comments from Reuters Hedgeworld:

"Hedge fund firm RAB Capital said on Wednesday [July 30] that clients had started putting money back into some of its funds helped by a recent upturn in performance, adding to signs the industry may be recovering."

And, "Hedge fund industry assets increased 7.5% to $1.43 trillion in the second quarter, buoyed by strong returns and lower redemptions by investors."

Then there's the mountain of money sitting in near-zero percent interest rate money-market funds -- a cool $3.5 trillion -- which, even with this morning's rip-roaring rally, represents 40% of the market cap of the S&P 500.

Now, I believe that stocks are more than fully valued. They could even be overvalued, if one concludes that the above-consensus earnings results of the second-quarter company reports contained far too many cost-cutting benefits and far too little top-line revenue growth -- which, by the way, was at consensus expectations compared to the upside surprise to the bottom-line numbers reported.

Moreover, I believe that the US major averages haven't made a completed bottom (see accompanying chart), which requires an upside breakout above their trading range via a mega trend reversal signal.

< Previous
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE