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MARKET SIGNALS
Source: The New Yorker
THE MATERIAL COVERED IN THIS PRESENTATION IS
THE OPINION OF THE PRESENTER AND SHOULD
NOT BE CONSTRUED AS A RECOMMENDATION TO
BUY OR SELL ANY OF THE SECURITIES MENTIONED.
INVESTORS SHOULD SEEK THE COUNSEL OF THEIR
FINANCIAL ADVISOR BEFORE MAKING ANY KIND
OF INVESTMENT. THE PRESENTER MAY OR MAY
NOT HOLD LONG OR SHORT POSITIONS IN ANY
OF THE SECURITIES MENTIONED.
The Facts
• We are not entering another Great
Depression. Following the Stock Market
crash of 1929 the government:
-raised taxes, increased interest rates
-Today we are doing just the opposite
A Typical Recession
• Averages 14 months in length
• Economic activity declines by 2.5%
• Unemployment rises by 2%
• - If unemployed, the average tenure is
six weeks.
• We’ve had two recessions in the last 25
years (early 1990’s and 2000 – 2001).
• They always end and the economy
always rises to a higher plateau.
Stimulating Enough?
Spring 2008
$170 Billion
Tax Rebates
Fall 2008
$350 Billion
Drop in gas prices
January 2009
$790 Billion
Economic Stimulus Plan
Since World War II
We’ve had 10 Recessions
•24 stock declines of 10% or greater
•13 stock declines of 20% or greater
What Counts is Corporate Earnings
Since WW II
•Corporate profits up 63 fold
•Stock prices have risen 71 fold
Darts vs. Professional Stock
Pickers
Oil Wells
Often Overlooked Oil
Oil
Dreco Energy Services
Price Graph
31 May
26June
26th July
23rd Aug
20th Sept.
19th Oct.
15th Nov
29Nov
Hang In There
Over the past 30 years the stock
market has produced an average
annual rate of return around 10%.
If you were out of the market during
the best 30 months your return
would drop to just 3%.
Bad Timing?
“People generally feel a stronger impulse to
avoid losses than acquire gains.”
Michael Pompian, CFA
S&P 500 Index
Average Equity
Investor Return
Data through 12/31/2008
3-yrs.
5-yrs.
10-yrs.
20-yrs.
-8.36%
-10.38%
-2.19%
-2.84%
-1.38%
-1.57%
8.43%
1.87%
Sources of Long-Term
Performance
Stock, Fund or
Money Manager
Selection
5-10%
Asset Allocation
90-95%
Portfolio Rebalancing Makes a Big
Difference
The Root of the Problem
•It all started with the housing bubble
•We have about 1.5 million too many
homes
•This is about 12 months worth of sales
•Much of the problem is regionally
based
•A dramatic slowdown in building and
an increase in housing affordability is
what eventually will solve the problem.
HEADLINE:
Lou Dobbs Hosts Moneyline
From Window Ledge
Source: www.theonion.com
Relevant
Economic/Financial Issues
1. Energy Issues
2. Interest Rates
3. Domestic Politics
4. Valuation Levels
5. Investing Demographics
Energy Issues
• Oil & Gas Prices will remain stubbornly
high
• Demand Strong – Especially China and
India
• Daily World demand dropped from 86
million to 81 million barrels in the past
year.
• Supply Weak –
– Increasing reserve “decline rates”
– Shortage of new prospects
New Refineries?
• NIMBY
• BANANA
• NOPE
Pricing: Oil vs. Natural Gas
•A barrel of oil usually sells at about 8 times
an mcf of natural gas. That ratio is now 20
times. Either oil prices are too high or natural
gas prices are too low.
•The past weakness in energy prices is
causing a big decrease in drilling plans and
lays the groundwork for future price spikes.
•There seems to be an inverse relationship
between oil prices and world peace.
Gulf Coast Wetlands
Of Critical Importance:
•1/3 of the nation’s energy
production
•Bulk of Country’s refining
capacity
•30% of America’s Seafood
•South Louisiana is the
Nation’s largest port
•Wetlands are a buffer
against storms
The Yield Curve As Prophet
Fall 2000
3 month
6.00%
10 year
5.70%
Slope
-30 basis points
Predicting a sharp decline in corporate earnings.
Summer 2003
3 month
0.95%
10 year
4.35%
Slope
+340 basis points
Predicting a huge increase in corporate earnings growth.
Summer 2006
3 month
5.10%
10 year 4.50%
Slope
-60 basis points
Projected an end to double digit EPS growth.
Important Yield Curve Spreads
Current Slope +335 Basis Points
Ten year treasury note (3.50%) minus
3-month treasury bill (0.15%)
Consumer Confidence Vs. Reality
The 1982 recession was the worst since
the Great Depression. Consumer
confidence is now 20% below the
level it was back then.
Unemployment
Inflation
Ten-yr. USTN
1982
11.0%
+10.0%
14.0%
Now
9.7%
+ 2.0%
3.50%
Typical Recovery
• Painful Layoffs
• Credit Markets Gradually Thaw
• Merger and Acquisition Activity Heats
Up
• Newly Streamline Companies. Small
Improvement in Business Brings Much
Larger Improvement in Profits
Political Performance
Standard & Poor’s 500
+99%
+83%
-6%
-26%
Bush’s First Term
Bush’s Second Term
+26%
Stock Market and Business Cycle
Many stocks are cyclical in nature.
They tend to perform better in specific stages of
business cycles. Forecasting these cycles can help
to put you in the right stocks at the right time.
Consumer Staples
Excel
Source: Fortune Magazine: 3/21/94
HEADLINE:
‘Wheel of Fortune’ Contestants Hit
Hard as Vowel Prices Skyrocket
Worker Blues
• THE BAD NEWS: 40% of the Country’s
skilled workers will be eligible for
retirement in 2010.
• THE GOOD NEWS?: Thanks to
declining 401K accounts most
everyone will keep coming to work.
• PERHAPS consider a “sabbatical”
Federal Reserve
Valuation Model
EPS for S&P 500
Price of S&P 500
$50.00*
10025.00
=
=
Yield on 10 Year
Treasury Note
4.85%
The 10 yr. Treasury Currently Yields 3.50%
*Forecasted 12 month EPS.
9/09/09
Fear Index
In February of 2009 Gold sold at $1000
an ounce and could then be
exchanged for some pretty useful stuff.
-150 shares of General Electric or 25
barrels of oil
-Today an ounce of gold could be
exchanged for 67 shares of General
Electric or 13 barrels of oil.
HEADLINE:
Mason-Dixon Line Renamed
IHOP-Waffle House Line
Source: www.theonion.com
“Tis Double Death To Drown In Ken of Shore”
-Shakespeare
-Twelve other Bear Markets since 1955
-Average decline was 22% and lasted 11
months
-These were followed by recoveries
averaging 12-month in length and
producing 35.0% returns.
-This is about 1.5 times the decline
-There are Trillions of investable dollars
waiting on the sidelines.
Investing Demographics
• “The Pig and the Python”
• Very high birth rates from 1946 – 1964
• Investing Concepts
- Financial Services
- Healthcare
- Leisure
What Drives A Stock?
Price
Earnings Per Share
= P/E ratio
Using Home Depot for Example:
$27.50
$1.45
08/12/09
= 19.0x
Wal-Mart 2001-2006
Wal-Mart Stock
P/E’s vs. Earnings Per Share
2007
$43.00
= A PE of 13.0x
$ 3.30
2001
$43.00
= A PE of 29.0x
$ 1.50
The stock has remained flat as EPS growth has
mirrored the decline in its PE ratio.
In 2001 Wal-Mart shares were “ahead of
themselves”.
Three Stages of a
Bear Market
Stage
Characteristics
1. DENIAL
Economy shows signs of slowing and stocks
fall from their highs, sometimes sharply.
Investors shrug it off and act as though the
bull market will last forever.
Stocks continue to decline. Investors start to
realize how weak the economy really is.
2. REALITY
3. SURRENDER Fear of deeper losses and a recession
become so worrisome that investors give
up on stocks, setting the stage for a
rebound.
Started In Economic
Downturns
• Procter & Gamble: The Panic of 1837
• General Electric:
The Panic of 1837
• General Motors:
the Panic of 1907
• United Technologies: The Great Depression
1929
• Fed Ex:
The Oil Crisis of 1973
• Microsoft:
1973 – 1974 Recession
GNP vs. Stock Market Valuation
The Future Has Not Been Cancelled
• Our economic problems are not
insurmountable.
• Have patience, this turnaround will not
happen overnight.
• The stock market is about 6-9 months
ahead of the economy.
• Capitalism Works. The human drive to
succeed is very powerful.
Great Reading/Sources
Popular Books
One Up On Wall Street, Peter Lynch (Simon & Schuster)
A Zebra in Lion Country, Ralph Wanger (Simon & Schuster)
The Money Masters, John Train (Harper & Row)
The Little Book That Beats The Market, Joel Greenblatt
Analytical Books
The Intelligent Investor, Benjamin Graham (Harper & Row)
Security Analysis, Benjamin Graham (McGraw-Hill)
Sophisticated and Well Written
Common Stocks and Uncommon Profits, Phillip A. Fisher (Harper &
Row)
The Contrarian Investment Strategy, David Dremen (Random House)
Great Investment Websites
Bloomberg.com
Investopedia.com
NPR.org (Planet Money)
MotleyFool.com
Seekingalpha.com
YahooFinance.com
www.burkenroad.org