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There are no new BLOG entries
this week. There's a reason for that- there's nothing exciting going on.
As you know, I use the BLOG in volatile markets. For now, our small
stock ideas are pretty boring. Extended periods of quiet trading always
lead to periods of extreme volatility. We had the correction. Now we are
having the quiet, sideways action. Hopefully, this leads to another series
of breakouts in our favorite names.
It's time to start thinking about
the next wave of new stocks. I'm going to deliver a series of new ideas
over the next two months with a common theme- the old economy. Old
Economy stocks are in. This is where the action is.
If you read the May
26th edition entitled "DOW
20,000, You Better Believe It", you know globalization is fueling the
rotation into old economy ideas. Much of the world is like the US in the
1950's and 60's- there is a major infrastructure build out going on, and
Old Economy US companies like Boeing, Caterpillar, and Alcoa
are
capitalizing on it.
It is inevitable this trend will
flow down to smaller companies. As such, I have uncovered a few new ideas
with old economy themes. I want you in ahead of the crowd. They all have
several things in common- very understandable business models and growing
sales and earnings. They are all trading at very reasonable valuations
with plenty of upside and fairly limited downside.
Stand by for the first new idea sometime
in the next week.
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The S&P
500- Can It Power Higher? |
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The debate goes on. Is the market
overbought? Are we due for a big correction? Are large cap stock values
getting extended? Are PE ratios out of hand? Instead of listening to the
talking heads with their agendas on CNBC, let's do something unique-
let's look at the facts.
The chart, derived from reading the
weekly review by Adam Olensis at www.theagiletrader.com,
is very revealing. Olensis plots the price of the S&P 500 against
trailing operating and reported earnings, and 52w forward looking earnings.
Of note is the following: The last
time the S&P 500 traded to its current level (about 1530), S&P
500 Companies were delivering about $55 per share in earnings. Today, with
the S&P at the same level (1530), S&P 500 companies are delivering
about $90.25 per share in earnings. Another words, earnings are 77% higher
as a percentage of price than they were at the end of the last bull market.
History tells us without a doubt
that the market was extremely overvalued in early 2,000. But, at today's
measure, one share of the S&P 500 has 77% more value than in 2,000,
despite being at the same price. There is plenty of room for upside.
Furthermore, consider the following.
With the expanding global markets fueling growth, 10% earnings growth for
the S&P 500 over the next 52 weeks is nearly a fait accompli. Note
the price of the S&P has pretty much climbed the earnings slope one
for one. It has accelerated a bit of late which suggests a short term correction
might be in order, but on the whole it has really tracked profit growth
very closely. This pattern should continue.
Adam Olensis predicts 1650 for the
S&P 500 before the end of this year. That's nearly an 8% move by year's
end, which is a very big year for the big stocks. This guy has an uncanny
knack for being right on these kinds of predictions. I wouldn't doubt him.
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Want
Something To Worry About? |
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Can't handle the prosperity in large
cap land? Looking for something to derail the party at the NYSE
and CNBC? It's out there, and I'll give it to you. In two words:
Interest Rates.
When interest rates are higher, earnings
are worth less to investors. Another words, in a low interest rate environment,
you get PE expansion- stronger multiples equate to higher stock prices.
In a high interest rate environment, you get PE retraction- lower stock
prices.
Bonds got clobbered this week- which
is another way of saying interest rates went up. Why? Because the pundits
who have been predicting a recession were blown out of the water by a number
of strong economic indicators.
Today's ISM (Institute of Supply
Management) numbers were outstanding, suggesting the economy may be growing
faster than previously expected (more old economy bullishness). Bonds sold
off (which means interest rates went up) as the market now believes the
FED is more likely to raise rates. Two months ago the bond market priced
in a 40% chance of a rate cut by year's end. Today, the bond market has
done a fickle 180 degree turn, and is pricing in a 40% probability of an
interest rate increase from the FED later this year.
The 10 year note is now hovering
around 5%, which is pretty high by modern day standards. All the housing
related stocks sold off today on fears higher interest rates would slow
the housing market even more.
Want something to worry about? -
keep an eye on the 10 year note- if interest rates climb to 5.5% (which
means bonds need to drop 10%), large cap stocks will sell off, and sell
off hard. The party will be derailed by inflation fears fueled by rapid
growth.
In the meantime, a 5% ten year note
offers plenty of upside in large cap stocks while we patiently wait for
the market to turn its attention back in our direction.
For the immediate future- the microcap
market is going to focus in on old economy themes, and I have a beautiful
idea for you within that theme. Boeing, Exxon, and Caterpillar
are all customers (amongst many others), and their growth is this idea's
growth as well. They do something for these behemoths no one else can do,
and business is very good. Stand by for a new idea in the next week or
so.
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