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Why the Market Price Is Justified


And confirmation that we've seen stronger economic growth.


Listening to CNBC yesterday morning I was struck by two key things: First, there are obvious factors/evidence that many are choosing to ignore. Second, we should always be mindful of what may not be obvious and try to skate to where the puck is going to be. However, sometimes the obvious meshes with where the puck is going. I find this especially true during times of great collective doubt.

Post 1991, it was very popular to doubt the rally. We were at war and the S&L crisis was far from being declared dead. It was an incredible time to believe that stocks deserved to be pushed higher -- especially in light of numerous signs of profound growth in many industries.

Moreover, when I hear that the market price is "unjustified" by "current fundamentals," I simply know we're going higher in the intermediate term and longer. My point is, that statement is just factually wrong. Aside from trailing P/Es -- which are hugely artificially depressed by the now-defunct FAS 157 rule -- the market is still quite cheap on nearly every other balance-sheet metric. Further, P/Es are rarely thought to be fair barometers of market valuation at and near earnings troughs. Normalized P/Es adjusted for the accounting changes should be used, yet you'll rarely see these sorts of analyses in print. But they're used by CIOs and investment-committee meetings as well as complex blackboxes. And these are saying that stocks are still well valued against competing asset classes.

Additionally, I called for much stronger economic growth months back and was nearly universally ignored. Now that multiple signs of confirmation are at our backdoor, most pundits are simply choosing to ignore them. And those that talk about the strength are thought to be Pollyannas. So here's a short list of confirming data points:

  • Just yesterday we saw surprising strength in retail sales.

  • The semiconductor strength is far beyond a restocking effect and, if anything, we need a full inventory restock in the silicon food chain. When this happens, what will the numbers look like?

  • In my view, we'll see continual signs of technology strength in routing/fiber, wireless infrastructure, enterprise storage (very strong), and IT software installs. Again, this isn't inventory related.

  • Very strong numbers in US GDP, ISM (Institute of Supply Management), Philly Fed, and Empire reports.

  • Months of strength in Germany, the UK, and much of Europe.

Oh, and I'm no longer alone in my contrarian economic view: Goldman has joined the black parade, calling for stronger GDP growth on a macro level. On a micro level, it's been on an upgrade rampage in recent weeks and just a few days ago, upped the whole industrial sector, raising ratings and/or price targets on General Electric (GE), Danaher (DHR), Dover (DOV), 3M (MMM), Illinois Tool Works (ITW), Roper Industries (ROP), United Technologies (UTX), Parker Hannifin (PH) and Kimberly-Clark (KMT). I don't think Goldman would be doing this if they were betting on the double-dip trip. (Illinois Tool Works also just raised guidance yesterday.)

Aside from economic fundamentals, a primary reason I still see sizable upside in the coming months is because we still have multitudes of names like Google (GOOG), Cisco Systems (CSCO), Broadcom (BRCM), Microsoft (MSFT), JPMorgan (JPM), Nasdaq OMX Group (NDAQ), NYSE Euronext (NYX), and best-of-breed solar that haven't moved much given the improved backdrop. So while a Baidu (BIDU) or Marvell Technology Group (MRVL) or STEC, Inc. (STEC) may look like they've moved far too much off lows (but likely not yet), many more high-quality names have experienced a fraction of the move higher.

So while I called for a 7-8% correction (see buzzes) about 5% ago, I still see the forest, the trees, and the shrubs. And from my perch, I think we're far from seeing the majority of this total move off lows in a fairly compressed time frame. Even so, I'm still operating from my trading standpoint, and thus sticking with my correction call. I remain largely long, but with sizable hedges and proactive premium collection strategies while actively trading around my core Nifty 15.

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