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Mr. Market: Your Moody Business Partner


Warren Buffett measures himself by growth in book value, not fluctuations in Berkshire's share price.


As the insightful Puru Saxena's writes:

Over the past 140 years, the return from American stocks has almost mirrored the growth in corporate earnings. During times of high volatility and great economic uncertainty, it pays to remember that stocks represent partial stakes in operating businesses. Therefore, as long as the businesses you own are producing satisfactory results, it is best to ignore the market's temporary appraisal of your holdings. It is worth noting that during secular bull markets, stocks outperform bonds and cash. Conversely, during secular bear markets, they produce disappointing returns (like they did in 2008). Fortunately, secular bear markets do not happen very often and they are always followed by lengthy and powerful bull markets.

And that, folks, is the real question. Are we in a new secular bull market, or just a tactical rally within a trading range stock market that we have envisioned since the Dow Theory "sell signal" of September 1999? Regrettably, while we, at my firm, would like to believe it is a new secular "bull market," we're sticking with the strategy that it is a tactical rally within an ongoing "range bound" stock market. If we're wrong, our accounts should experience good returns. If we're right, said accounts should still achieve decent total returns, on a risk-adjusted basis, given our emphasis on dividend paying stocks.

Speaking of dividends, the iShares Trust DJ Select Dividend Index Fund (DVY) broke out to a new recovery high last week, as can be seen in the nearby chart. We like dividends and would note that since 1926 dividends have accounted for roughly 44% of the stock market's total return. Dividends also tend to give investors the "margin of safety" Benjamin Graham spoke of in the last chapter of his book The Intelligent Investor. This week a number of stocks in Raymond James' universe of stocks will go ex-dividend. Some of the names we have recommended include: Home Depot (HD); NTELOS (NTLS); Allstate (ALL); Leggett & Platt (LEG); and Family Dollar (FDO). Meanwhile, CenturyTel (CTL) went ex-dividend last Friday and its share price was reduced accordingly. We think that reduction affords an attractive entry point. We also continue to think small capitalization Japanese stocks are, in aggregate, one of the world's cheapest investments. Selling below book value, and at a price-to-sales ratio of 0.40, we believe the risk/reward ratio is attractive. Hereto, we favor dividends and are using Wisdomtree's Japan Small Cap Dividend Fund (DFJ).

The call for this week: One year ago we stated that the bottoming process that began in October 2008 was complete and we were "all in." We won't have that same opportunity this year for we're at the Raymond James 31st Annual Institutional Investors Conference with more than 300 presenting companies and some 700 portfolio managers. Consequently, these will likely be the only strategy comments for the week. Nevertheless, it still appears that the new year's "selling stampede" ended with the "hammer lows" recorded on February 4 and 5, and, we tilted accounts accordingly. Meanwhile, March, April, and May are seasonally the strongest months of the year for the S&P 500. Combine that with the fact that the breadth figures have been stronger than the S&P's actual price rise, and that positive fourth-quarter earnings and revenue surprises in 2009 have exceeded 70%, and we see no reason to alter our 1200-1250 intermediate-term price target.

That said, the S&P has expended a lot of energy, rallying back to the 1140-1150 overhead resistance zone, so it wouldn't surprise us to see the markets stall for awhile before trending higher. As for the recent spate of softening economic reports, it feels like consumers are merely reacting to a winter that is now legend. Our sense is the stormy February data will abate with spring. Evidently Warren Buffet thinks so as well given his recent statement, "We got past Pearl Harbor (and) we will win the war. It's going slightly our way."

No positions in stocks mentioned.
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