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There's a new Blog entry on Xenomics
(OTC BB: XNOM). The company has entered into a second agreement with
Eastern Virginia Medical School to get clinical trials underway. XNOM's
transrenal DNA technology is fascinating. As usual, your comments and questions
are welcome. I'd particularly like feedback from anyone in the biotech
arena who understands the potential.
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Check back frequently for updates particularly when stocks are moving to
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What's a Dollar
in Profits Worth? Are Stocks Undervalued? |
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Lately I've been receiving some negative
correspondence from members who's stocks are down. Pretty much everything
not energy related is down this year. For those of you who are looking
to take a profit- remember Torrent Energy Corp (OTC BB: TREN)-
I wrote five editions on the company starting last August 3rd at $.90.
It closed this past Friday at $1.60 after touching off $2 earlier in the
week- Go ahead and sell that one.
I don't mind fielding the negative
commentary- it's part of the job. However, I just don't understand why
anyone would complain after reading the April
2 edition which was entitled "Short Term Traders Stay Out".
In that edition, I suggested everyone who was not prepared to grind through
potential value erosion for the foreseeable future should sell all their
stocks.
As it turned out, stocks have traded
very poorly for the last six weeks on low volume. It reminds me a lot of
May and June of '04. Stocks turned around in Mid August last year, and
we had a couple of doubles and triples before the end of the year.
I believe it's now time to start
thinking about whether stocks are truly undervalued, and begin to look
for the market to turn around.
Are we in a Bull or Bear Market?
Correction
in an ongoing Bull Market, or the first leg of a Bear Market? These are
the questions plaguing Wall Street today.
It was a confusing week, and one
that most traders are glad to put behind them. Take retail sales for example-
mid week retail sales numbers came out, and they were robust. However,
on the same day WalMart announced weak retail sales and a relatively
gloomy forecast. So- is WalMart, the 1200 lb gorilla in the retail
world, a leading indicator of an economic slow down, or is this a WalMart
specific anomaly?
I don't know, but here's a few things
I do know. I know the worst possible economic environment for the stock
market is slowing growth combined with inflation. This equals bear market
every time.
The FED still thinks inflation is
tame if you take out energy and commodities. Why do we get to take out
energy? Oil is up 70% over the last year, and the price of oil has a ripple
effect through the entire economy. This has to be inflationary.
I also know stocks are definitely
undervalued. Stocks are undervalued because Wall Street is petrified of
high inflation and slow growth. This environment is already priced into
the market. Here's what I don't know: when they will get expensive again.
How do I know stocks are cheap? Here's
a very simple way of looking at it. Let's look at what $1 in profits costs
in both the stock and bond market. Here are two eye opening facts:
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10-Yr Treasury Note currently has a
yield of 4.12%. Bond investors are willing to pay $100 for $4.12 in earnings.
Or, put differently, they're willing to pay about $24.00 for $1 in profits.
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The SPX's earnings yield based on F52W
operating estimates is now at 6.62%. In the stock market investors are
only willing to pay about $15.00 for $1 of the coming year's profits.
The 10 year Treasury costs $24 for $1
in profits. The S&P 500 costs $15 for $1 in profits. $1 in profits
on the 10 Year now cost 60% more than $1 in profits on the S&P 500.
This fact means nothing without knowing
how the two normally correlate. In fact, over the past 25 years, the average
disparity between the costs for $1 in profits between stocks and bonds
has averaged .90- meaning the two numbers have been within 10% of each
other. They are now off by 60%.
I don't know when stocks will get
expensive again, but here's one man's opinion.
Tom McClellan of the McClellan Market
Report believes stocks are about to make a double bottom and then rocket
up the charts. Here's a chart he provided which compares 2005 to 1998.
The lower line is the S&P 500 in 1988, the upper line is the S&P
500 this year.
If the pattern repeats itself as
McClellan believes, we should have one more blow off which will convince
everyone stocks can never come back, and then surge in June.
In 1998 the surge began in early
June and carried the S&P 500 up 25% in two months. That's a huge move,
and should translate into much grander moves in smaller stocks.
If this scenario plays out, I should
be able to find some profitable ideas akin to FHRX, PDLI, and ARIA- all
of which have been strong winners over the last month.
I'm usually not gung ho as we come
into the summer months, but we usually don't sell off as hard we did in
Q1. Get some money ready for trading ideas if the market sets up in our
favor.
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