Friday, February 29, 2008

Quotable Quotes: Buffett and Templeton

As investors leap to conclusions, uncertain times are best put into perspective with words from those more knowledgeable than most.

“Humility about how little I know has encouraged me to listen more carefully and more wisely.”
John Templeton

“Before this century is over, the Dow Jones Industrial Average will probably be over one million versus around 10,000 now. So for the long-term, the outlook is tremendously bullish if you buy stocks blindly to keep for a century.”
John Templeton

“Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.”
Warren Buffett

“Our favorite holding period is forever.”
Warren Buffett

Have a good weekend.

Thursday, February 28, 2008

Valuation Gap Closing. Near Term Upside Still Intact.

The equity rally coupled with the rise in rates (10 year US Treasury) over the past several weeks has brought US stocks close to a temporary stalling point. This can be seen on two levels – one technical, the other fundamental.

From a technical analysis perspective, the chart to your left* shows that one short-term metric (slow stochastic) is registering a near term overbought (80 reading or higher) while two other short-term indicators (momentum and MACD) are positive (upward slope to each). To some the fact that the S&P 500 touched its 50 day moving average and then backed down will be interpreted as the market encountering resistance at its moving average. This point is both wrong and largely useless as stocks and indices crisscross their 50 day moving average with great regularity - a point I have noted several time before and as can be seen by looking at the above chart)

(FYI - for more technical analysis perspective, I encourage you to listen to my interview with Louise Yamada posted yesterday.)

From a fundamental valuation perspective, stocks have closed their valuation gap (see Expected Return Valuation Model)** to some degree thanks to the rise in stocks and rates. However, the expected return at a reasonable $82 operating earnings number for 2008 is still averaging around 20% upside potential.

Investment Strategy Implications

The valuation gap has closed to some degree. However, stocks remain sufficiently undervalued to warrant a near-term bullish bias. As for the technicals, while the mega trend is negative (see prior blog postings on the Moving Averages Principle), the near-term indicators remain mostly positive and will likely improve once the near-term overbought is resolved.

*click on image to enlarge
**subscription required

Wednesday, February 27, 2008

Beyond the Sound Bite: An Interview with Louise Yamada, CMT

"Key items discussed with the Managing Director of Louise Yamada Technical Research Advisors includes the view of the current market, the longer term context of the current market environment, the "hybrid market", the global build out, and the early 2008 weakness in Tech and Telecom."

All Beyond the Sound Bite postings can be found at
To listen to this week's podcast interview, click here

Tuesday, February 26, 2008

Unthawing the Deep Freeze

It seems logical that one way for investors to keep an eye on whether the credit freeze has begun to thaw is to track the Fed’s Term Auction Facility (TAF). The data to your left* shows the results for each of the TAF auctions.

Investment Strategy Implications

Along with credit spreads, the TAF results should provide useful data re signs that the freeze at the core of the banking system is beginning to thaw. An unthawing of the credit freeze will be an indicator that some semblance of normalcy is returning to the economy, which should be anticipated by the financial markets.

Based on the TAF data noted, there appears to be no sign that the thaw is underway.

*click on image to enlarge

Monday, February 25, 2008

The Return of the Risk Trade

excerpts from this week's report:

"One of the immediate impacts of the US stimulus package (monetary and fiscal) has been the significant improvement in the relative performance of the higher risk portions of the US and global economy. I am referring to specifically the Smids (small and mid cap) and segments of the emerging markets, notably Latin America..."

Investment Strategy Implications

"Merrill's strategists have rightly identified the return of risk taking as a key risk to the large cap growth theme (see chart above with large cap growth, IVW, as the worst performer listed thus far this year, especially since the aggressive Fed rates cuts of mid January). In an alpha challenged investment climate, embracing the risk trade will likely be..."

"... the recent addition of ILF to the Model Growth Portfolio has already paid dividends. More on Latin America and Brazil in the coming weeks..."

also in this week's report:

* Expected Return Valuation Model
* Moving Averages Scorecard
* Model Growth Portfolio
* Sectors and Styles Market Monitor
* Key US Economic Indicators

*To gain access to this week's report (and all reports), click on the subscription information link to your left.

Friday, February 22, 2008

Quotable Quotes: Great Moments in Presidential Speeches

Today is George Washington’s birthday. To commemorate the birth of our nation’s first President George, here are a few words from the current President George.

"Rarely is the questioned asked: Is our children learning?"

"Our enemies are innovative and resourceful, and so are we. They never stop thinking about new ways to harm our country and our people, and neither do we."

"Too many good docs are getting out of the business. Too many OB-GYNs aren't able to practice their love with women all across this country."

"See, in my line of work you got to keep repeating things over and over and over again for the truth to sink in, to kind of catapult the propaganda."

Have a good weekend.

Thursday, February 21, 2008

If History Repeats…

There is a certain point of view expressed by more than a few economists and strategists equating the current so-called consumer-led recession with the last actual consumer-led recession of 1990. If that is the case, then a little factual information might help.

The table* above lists the salient data for the period immediately before, during, and after the 1990 recession. For comparative purposes, I have added the same data for the current period leading up to the market top last October.

In the early 90’s, the actual consumer-led recession resulted in operating earnings declining 20.6%, the 10 year Treasury began its multi year slide (eventually to 5.4% in Sept. 1993), and P/Es expanded as the equity market experienced its “bear” market in short order. How short?

The chart* above shows the extent of the “bear” market in 1990 – a touch over 20% in all of three months. The chart also shows how the “bear” market of 1990 did not test its lows once it got going to the upside climbing a wall of worry in the process.

Investment Strategy Implications

Going into the current “bear” market, P/Es and rates were hardly at inflated levels last fall. This fact is even more the case now that stocks have declined by a double-digit amount.

What this brief tour of the facts suggests is that investors must believe that the current “bear” market and consumer-led “recession” has more pain in store than the earnings and the market experience of the early 90’s. If not, then history may repeat itself by producing a painful yet brief “bear” market - if it hasn’t already.

*click on images to enlarge.

Wednesday, February 20, 2008

Beyond the Sound Bite: An Interview with Phil Orlando, CFA

My conversation with Federated Investors' Chief Equity Market Strategist includes a no recession call for 2008, the outlook for the US economy and markets, valuation, and corporate profitability.

All Beyond the Sound Bite postings can be found at
To listen to this week's podcast interview, click here

Tuesday, February 19, 2008

January Lows May Not Be Tested

excerpts from this week's report:
"The consensus view is that the market is in the midst of a bear market rally. Therefore, the next move should be to the downside. The question among consensus thinkers is that when (not if) the market makes that move, it will test the January lows and then potentially set a market bottom enabling a sustainable advance. The contrarian in me wonders, however, if this isn’t just a little too neat and tidy, in keeping with the full year estimates of most strategists and investors. Therefore,

What if the January lows are not tested?

This, of course, begs the question, what is the basis to believe that the lows will not be tested? The answer lies both in the present and in the not too distant past, specifically 1990 - the last consumer-led recession.

The evidence from the present is rooted primarily in two factors.."

also in this week's report:

* Expected Return Valuation Model
* Moving Averages Scorecard
* Model Growth Portfolio
* Sectors and Styles Market Monitor
* Key US Economic Indicators

*To gain access to this week's report (and all reports), click on the subscription information link to your left.

Friday, February 15, 2008

Quotable Quotes: Fear

Since the credit-crisis bears are firmly convinced that the glass is half-empty AND leaking out of the bottom, a few words on fear seem timely.

“The only thing we have to fear is fear itself - nameless, unreasoning, unjustified, terror which paralyzes needed efforts to convert retreat into advance.”
Franklin Delano Roosevelt

“Collective fear stimulates herd instinct, and tends to produce ferocity toward those who are not regarded as members of the herd.”
Bertrand Russell

“Fear less, hope more; eat less, chew more; whine less, breathe more; talk less, say more; hate less, love more; and all good things are yours.”
Swedish Proverb

“There are nights when the wolves are silent and only the moon howls.”
George Carlin

Have a good weekend.

Thursday, February 14, 2008

Technical Thursdays: Moving Averages Principle – A Valentine's Day Gift

As time passes, an increasing value can be found in the Moving Averages Principle (MAP) that I developed over the past several years. In today’s edition, let’s illustrate by looking at three distinct slices of the equity markets in two distinct MAP phases – Latin America 40 (ILF), Financials (XLF), and Small Cap style (IJR).

In the first chart (ILF)*, you can see how price is currently above both moving averages (50 and 200 day), that the 50 day has not crossed the 200 day, and that the 200 day slope is upward. These are the three key components of the MAP – price in relation to moving averages, moving averages in relation to each other, and the slope of the moving averages (particularly the slope of the 200 day).

Note how price did cross both the 50 and 200 day on numerous and several occasions, respectively, over the past two years. Yet, at no time did the three components of MAP occur. The bullish mega trend is intact. Now, contrast this data with our second chart – Financials.

The XLF chart shows price crossing the 50 day moving average on many occasions and the 200 day several times. However, it wasn’t until late summer/early fall last year that all three MAP conditions were met for a mega trend reversal call to be made.

The third chart (IJR) shows the same pattern as the Financials.

Investment Strategy Implications

The Moving Averages Principle takes the base form of moving averages analysis to another, more effective level. By going beyond the tried but not quite true method of declaring a stock in a mega trend change whenever it crosses just one of its major moving averages (most notably the 200 day), the MAP produces far less false signals.

A few points to remember re the MAP:

The application of the MAP applies most effectively to overall markets/regions, sectors, and styles. However, the application of the MAP is somewhat less effective when it comes to industries and even less effective when applied to individual stocks. The reason for this reduced effectiveness apparently pertains to the fact that the closer you get to those areas of the economy that are subject to more issue specific factors, the higher the odds are of any market-based tool generating false signals.

Additionally, at no time does the MAP negate the need for judgment. For example, there are times when effective tools like the MAP will be on the cusp of producing a mega trend change signal requiring judgment (including bringing into consideration other factors, such as a fundamental view).

While no tool is foolproof, the MAP has demonstrated its usefulness many more times than not. And certainly far better than the basic crossing of a moving average.

To learn more about the MAP, see prior blog postings under the topics discussed segment of this blog – Moving Averages Principles.

*click images to enlarge
Note: Accounts managed by Blue Marble Research own positions in ILF and XLF.
Neither Vinny Catalano nor any member of his family own positions in any of the above issues.

Wednesday, February 13, 2008

Beyond the Sound Bite: An Interview with Dr. Ian Bremmer

Beginning today, all Beyond the Sound Bite postings can be found at

This week's guest is Dr. Ian Bremmer, President, Eurasia Group. To listen to the podcast interview, click here

Tuesday, February 12, 2008

All Bad is Not Good

“At the moment the media remains firmly on gloomwatch, which is mildly encouraging. The credit crunch will be over long before the press has finished dissecting it.”
Jonathan Davis
“How investable knowledge got scarce”
Financial Times, February 10, 2008

The flip side of early 2007 is in full force in early 2008. A year ago, goldilocks was all the media rage. Now her evil sister, gloomdilocks is running amuck in media land. Yet, as Mr. Davis implies in his recent excellent FT commentary, a little objectivity wouldn’t hurt. Take for example, the credit crisis.

I recently noted two separate pieces of information from two distinct and unrelated sources re the current credit crisis that should help put things in some perspective.

First, the remainder of the credit crisis is likely to be more of a slow rolling event. This point was noted by two of my Market Forecast panelists in Denver (see blog posting, “Wait ‘til Next Year, Feb. 1, 2008). Why? The answer to this question comes from my interview with S&P’s Chief Economist, David Wyss (see blog posting, “Beyond the Sound Bite: An Interview with David Wyss”, Feb. 6, 2008). In the interview, David points out that most of the must be published data re credit related losses (by the banks and other publicly traded entities) has already been done. One third of the write-offs by his reckoning. However, and this is key, the remaining two thirds sits with those entities who do not have to mark to market every credit derivative product they have on the books as their reporting requirements are significantly different from the high profile, publicly traded ones*.

Who are these entities? The very same ones that are providing liquidity to the high profile, publicly traded entities; the ones that have lots of cash to on hand – foreign entities (including sovereign wealth funds), hedge funds, and private equity.

Investment Strategy Implications

My bet is that three months from now, the media focus will shift from the gloom watch it is currently obsessing on to how resilient the US (and global) economy is turning out be as tax rebates, rate cuts, and a more robust global growth story help bring equities back to some semblance of fair value. Moreover, the credit lock up at the core of the banking system will likely begin to loosen up thereby producing some semblance of a return to credit generating normalcy enabling corporations to function more normally.

With a stock market that is in undervalued and oversold territory, the downside from the low 1300’s appears limited. Should the environment look brighter this spring (as I suspect it will), investors may regret getting too swept up in the media moment of extreme pessimism.

*Moreover, for those private entities who do experience credit related blow ups, the odds that their pain will extend to the larger financial and real economy is significantly less likely than in the banking and publicly traded company domain.

Monday, February 11, 2008

What Are the Sell Side Analysts Smoking?

excerpts from this week's report:

"The gap between what sell side analysts are forecasting for 2008 and what the market is estimating (based on current market values) is wide and gets wider with each passing day. Standing at a whopping 30% (rough average of $102 versus $72 S&P 500 operating earnings), one would assume, of course, that sell side analyst estimates will start their descent to reality once..."

"Consider the table of earnings estimates for the large, mid, and small cap of the S&P 1500 on the following page (see report)..."

Investment Strategy Implications

"It is hard to argue with the top down estimates of a flat to slightly down earnings year ahead. It is easier to argue against the dire forecasts of a plunge in earnings that the current market valuation levels strongly suggest. And it is very easy to argue against, even dismiss, the cumulative earnings numbers being put out by sell side analysts..."

"It therefore seems logical to conclude that somewhere between the optimistic dream world of the sell side analyst forecasts and the hellish prediction of the bears (as expressed by the current valuation levels of the market) lies the highest probability of earnings for 2008 and, thereby, where the market might end up.

With that in mind, here is (see report) a rough top down, worse case probability estimate of the S&P 500 operating earnings for 2008..."

also in this week's report:

* Expected Return Valuation Model
* Moving Averages Scorecard
* Model Growth Portfolio
* Sectors and Styles Market Monitor
* Key US Economic Indicators

*To gain access to this week's report (and all reports), click on the subscription information link to your left.

Friday, February 8, 2008

Quotable Quotes: Battle

As the political season heats up, a few words on doing battle.

"O God, that I were a man! I would eat his heart in the market-place."
Hillary Clinton (playing Beatrice in Shakespeare’s “Much Ado About Nothing”)

“One of the key qualities that you need to be a great hockey player is fantastic anticipation and feel for the game - if you know where the puck is going before it is hit, that is half the battle.”
Wayne Gretsky (rendering advice to stock market timers)

“A leader who doesn't hesitate before he sends his nation into battle is not fit to be a leader.”
Golda Meir (commenting on George W. Bush)

“Give me a handful of Westpoint Graduates and I'll win the battle. Give me a handful of Texas Aggies and I'll win the war.”
George Patton (being George Patton)

“To be nobody but yourself in a world which is doing its best, night and day, to make you everybody else means to fight the hardest battle which any human being can fight; and never stop fighting.”
e. e. cummings (rendering advice to all)

Have a good weekend.

Thursday, February 7, 2008

Technical Thursdays: Is This How Bear Markets Are Supposed To Start?

The bears (and many bulls) are convinced that stocks in the US are in a bear market. However, if this is a bear market then it has to be off to one of the oddest starts in memory. Consider the above three images*, the first two show the performance of the styles (mega, large, mid, and small) across the size spectrum and the third is a table of relative values.

* The first chart above shows the relative price performance of the four size categories – mega, large, mid, and small.
* The second chart above compares across the size spectrum, large, mid, and small, from a style perspective - growth.
* Finally, the third image is a table that compares the P/E and PEG ratios of the large, mid, and small cap groupings.

Investment Strategy Implications

Since the aggressive monetary policy response of the past two weeks by the Fed, what looked like the beginning of a performance gap within the size styles has come to an abrupt halt. Granted it may resume with the mega and large caps outperforming the Smids on a sustained basis, but I suspect that will turn out to be wishful thinking by the bears and an unreasonable fear among the bulls. The reason for this conclusion lies in the real economy of earnings and valuation - The Smids are just not overvalued relative to their big cap brethren. Moreover, there is more than a reasonable chance that the earnings collapse necessary to match up to the valuation levels that current market prices are predicting (-20%) may prove to be overly pessimistic (see Expected Return Valuation Model in this week's report**).

If the equities markets have entered a bear market, they are sure off to an odd start.

*click on images to enlarge
**subscription required

Wednesday, February 6, 2008

Beyond the Sound Bite: An Interview with David Wyss

Topics discussed include the prospects for a US recession, risks of contagion, decoupling, risks of large amounts of liquidity, the credit crisis, and a 2008 outlook for S&P 500 operating earnings and the 10 year US Treasury.

The length of the interview is 9 minutes 20 seconds.

Tuesday, February 5, 2008

Advantage: McCain

If today’s primary results hold to expectations, the Republicans will gain one vitally important advantage regarding the general election this fall – time.

The likelihood that neither Democratic candidate will emerge from Super Tuesday as the prohibitive favorite means that both Clinton and Obama will have to continue to slug it out for weeks and months to come (possibly right up to the convention). And, in the process, use up considerable resources (time and money) battling each other. On the other hand, if John McCain becomes the presumptive Republican candidate, he can then focus on refining his general election message, shoring up his support among suspicious conservative voters, and replenish his depleted coffers by not having to spend serious sums of money for future primaries.

Investment Strategy Implications

It’s far too early to know what the investment implications are regarding the fall election outcome. One thing is fairly clear, however: should today’s outcome leave one person standing in either (but not both) party, that person gains a considerable advantage over his/her opponent. And that person is looking increasingly like Senator John McCain.

Monday, February 4, 2008

The Eye of the Storm

excerpts form this week's report:

"Perhaps they haven’t felt it quite yet but the stock market bears should study yesterday’s Super Bowl for they risk looking a lot like Tom Brady – under siege.

As noted in Friday’s blog posting, the odds of a US (and potentially global) recession this year have diminished thanks to the stimuli from the US government and the Fed’s aggressive rate cuts. What this means is twofold:

• US equities should not be priced for recession, which means prices can...
• The economic effects from the stimuli appear to have a limited shelf life creating..."

Investment Strategy Implications

"The Model Growth Portfolio’s fully invested position reflects the view that equities are undervalued and higher prices should occur. While the global growth story may not produce a complete decoupling, last week’s economic reports..."

"As for the technical picture, it is debatable that we have entered a bear market. For example, much has been made by many market technicians that the Dow Theory has produced a sell signal. I beg to differ on this point, as the chart below (see report)..."

also in this week's report:

* Expected Return Valuation Model
* Moving Averages Scorecard
* Model Growth Portfolio
* Sectors and Styles Market Monitor
* Key US Economic Indicators

*To gain access to this week's report (and all reports), click on the subscription information link to your left.

Friday, February 1, 2008

Wait ‘til Next Year

Dispatch from Denver:

Last night’s Market Forecast event here at the very scenic Pinnacle Club produced, as usual, many valuable insights from my panelists Mary Ann Bartels, Don Rissmiller, Chris Taggert, and Vitaliy Katsenelson, which I will elaborate on in future blog postings and reports. There is one item, however, that I wanted to pass along today that I think would be of immediate use – the increasing odds that the whatever re a recession in the US now looks like a whenever, as in next year.

This thought comes from Don Rissmiller of Strategas. Don believes that the odds of a recession occurring in the US is now greater next year (60%) as opposed to this year (40%). The basis for this view rests with the large amount of stimuli from the Fed and the US government in a major election year (and all that brings with it. Think pork barrel earmarks.).

Investment Strategy Implications

Pushing the US recession into next year has certain elegant qualities to it in as such an occurrence has many ties to a technical picture of the equity markets that still has rally written all over it. Investor sentiment so rabidly bearish along with the much too nice and tidy consensus thinking of the majority of investment strategists (down 1H08, up 2H08) provides fuel to the contrarian fire. Moreover, the justifiable concerns re huge losses emanating from the credit crisis is likely to take more time than many (including me) think it should (a point noted by two of my panelists last evening, Rissmiller and credit expert Chris Taggert.)

Wait ‘til next year is a phrase that is often applied to sporting events (such as the feeling Patriots' fans will experience this Sunday when their team loses to the Giants!). It now appears that when it comes to the recession the phrase will likely apply to US economy as well.

Have a good weekend.