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http://dshort.com/articles/ECRI-Weekly-Leading-Index.html

 

I thought that the reading would somehow get better this week, but it is just the opposite. There is nothing perfect out there, but this index has never failed matching a recession since the early 70's at such declining rate.

 

The stock market at the moment is extremely optimistic dismissing any bad news. Just watch what happened with AMZN yesterday to see what I mean. At the same time, it is acting very negatively with some stable companies. Flash trading, PPT? Logic is certainly absent out there. This whole thing could flip the other way in an instant.

 

While earnings are currently quite good, revenue growth appears very weak. There are also many issues that may resurface at any time: sovereign debt downgrades, Iran, North Korea. The entire focus has been on earnings, but after that what will they think of?

 

I won't deny that there are some attractively valued companies out there, but you have to be very selective, be prepared for 2 to 3 years before this value surfaces and ensure that they can survive a major air pocket. Seems like a great opportunity to let go companies that you may not like as much as others.

 

Cardboard 

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There was also an article entitled "Event Horizon" in this months CFA magazine.

 

European PM's see Europe as high risk, & are indiscrimanently selling Europe to move into Emerging Markets. Despite EM valuation being highly leveraged to liquidity (currently high re the herd mentality) & quality differences between a German and Italian instrument are not being recognized.

 

A sudden European liquidity demand could very quickly end in tears.

 

SD

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I don't agree that "The stock market at the moment is extremely optimistic" and don't see where you're coming from on this. The market has been 'optimistic' for about the last 3 days, based on a lot of strong earnings reports, and has been very pessimistic for the last month or 2.

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Hussman agrees with that. He uses several indicators which combined with ECRI allow him to express opinions about possible recessions.

He warned in 2000, November 2007 and he is warning again now. In the last 40 years, the number we have already reached this month always corresponded to a recession. Less negative numbers that were not accompanied by a recession (twice) occurred however close to the crash of 87 and the Asian crisis.

This is a warning sign.

 

I do not think the market was pessimistic in the last 2 months, it was in correction mode and some bad news helped. After the surge since march 2009 it seemed rather likely that a correction would happen at some point and that professionals would expect one and act in consequence. The market is now back to optimism because of earnings news. There has to be job creation and more vigorous high ticket items markets for these good news to last. Revenue overall is down. The stimulus is waning and governments are thinking about the next elections being rather hesitant in stimulating more. Debt levels are still extremely high at the consumer level. I think valuations are still very generous. We will find out soon in my opinion.

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I thought that the reading would somehow get better this week, but it is just the opposite. There is nothing perfect out there, but this index has never failed matching a recession since the early 70's at such declining rate.

 

I think these types of statistical tools are almost useless.  Common sense dictates that when rates are near zero or at least extremely low, that generally is a good thing for corporations as their cost of capital is also lower.  Take a look at spreads for financial institutions...they are fantastic still.  You also have many businesses that have already reduced their debt loads, now they can finance debt that is coming due at very good rates.  While a recession may be on the horizon, I'm not sure that should dictate how you invest.  We should always buy cheap and sell dear...simple!  Forget the statistics and technical analysis.  Cheers!

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Guest dealraker

"We should always buy cheap and sell dear...simple!  Forget the statistics and technical analysis."

 

Parsad's 15 words are the way to go.

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"We should always buy cheap and sell dear...simple!  Forget the statistics and technical analysis."

 

Parsad's 15 words are the way to go.

 

I don't disagree with what Sanj has said in the least - but Cardboard's point has merit as well. If the US and indeed the entire world is headed into a second slowdown while the market is busy projecting 15 to 20% earnings growth for next year, then the market is going to be disappointed isn't it when reality sets in. And when that happens stocks are going to get cheaper, much cheaper.....

 

cheers

Zorro

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I agree.  Even though it may be helpful to know a recession is coming, how is that going to help you invest?  There are so many moving parts and uncertainties it is like predicting climate change (nice to know) but what do about it is very uncertain.  It may be more helpful to the politicians than the stock analysts.  At least with valuation levels of particular stock you can focus on what directly matters to a stock.

 

I don't disagree with a double-dip but I think folks are too senstitive to a slow down due to the last downturn (looking in the rear view mirror).  Some things may get cheaper but when large cap steady stocks are trading @ 10% FCF yields assuming 0% growth and some smaller firms can be found in the 20 to 45% FCF yield range with no growth, then the response should be to buy the cheap stocks.  Waiting for the bottom to me has been a loser game.  The nice thing about this type of analysis and reliance on it is that it creates these cheap stocks.

 

Packer

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I don't disagree with what Sanj has said in the least - but Cardboard's point has merit as well. If the US and indeed the entire world is headed into a second slowdown while the market is busy projecting 15 to 20% earnings growth for next year, then the market is going to be disappointed isn't it when reality sets in.

 

India is growing at close to 10%. China is having inflation issues too - so much so that some production from China (textiles, furniture, auto components) is moving to other countries such as Bangladesh, Vietnam and India.

 

The corporate balance sheets are pretty good as is the balance sheet of small business. The refusal of banks to lend has caused the businesses to tighten the belt and they are willing to hire again. The hiring wont happen fast enough to reduce unemployment significantly. Generally, there is no sign of slow down in business in the US compared to an year earlier. Check the rail stocks if you need confirmation.

 

If there is slowdown, it is an opportunity to make more money.

 

cheers!

shalab

 

 

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"If there is slowdown, it is an opportunity to make more money."

 

Hence my point. IMO, it is not a bad idea at the moment to be hedged or to carry some cash on the sidelines. You won't make any money from a slowdown unless you have cash available and/or will be willing to let go your cheap stocks for cheaper ones. That is unless you manage a fund or have a large salary vs your investments where money keeps coming in every month.

 

I do hold some small companies at the moment that I believe are very cheap even per late 08, early 09 valuations, but I would be careful to venture elsewhere.

 

I think that people also forgot one key metric. The S&P has been trading at 14 to 15 times earnings on average over the past century. This means that the biggest and even most stable companies, but growing slowly (5-6%) should not deserve a much higher multiple than the average. If you are able to buy them at these levels, then you should expect the average return from the stock market over the past century. Not 20%. I sense some investors salivating at these big caps valuations, while for the most part they are just normal and these earnings projections always ignore the cost of severances, write-offs, disappointments and the delay in earnings accummulation that is created by an economic slowdown. I see too many people expecting to make a fortune with the likes of Intel, Microsoft, P&G, UPS, JNJ, Wells Fargo and many others at current prices.

 

So I guess the current attractiveness of the general market depends on your rate of return expectations. 25-50% a year is what thrills me. IMO, that is the reward and logic for an individual spending a fair bit of time investing. Deals like that are just much more rare than they were 12-24 months ago, so my guard is up. If I was looking for 8-10% a year or kind of match the market, I would give my money to a few good funds, buy a few select large caps and play golf all day or find a different interest.

 

Cardboard

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Interesting discussion...  For the past 12 years I have had a strategy of buying cheap stuff and then selling when it has gone up. My holding period for any one stock has rarely been more than 2 years. I also have been able to successfully 'time' sectors and the general market (not in tech in 2000, other than FFH no investments during the late 2008/ early 09 crash). I have also been VERY concentrated at times (80% in FFH a couple of times).

Today I see an overall market that is not crazy expensive (compared to what the PE was in 2000 or 2008). Interest rates are also VERY low. The CAN$ has appreciated significantly versus the US$. A key macro risk is where the US goes from here (recession or bumpy slow growth).

 

Given the current environment (and my changed situation) I wonder if I need to evolve my strategy a little and become more of a buy and hold investor. Rather than hold bonds, I have decided to over time build a portfolio of reasonably valued large cap stocks (ABT, JNJ, BAX, XOM, MSFT). These co's have good long term track records, have decent management teams, low debt, pay a dividend and should be able to grow earnings at 8 to 10% per year (in aggregate). BDX has sold off recently and I may add to the above list. I also hold 2 small caps (GVC and SFK); GVC I like as a long term hold and I bought SFK recently (a moment of weakness?) purely as a short term speculation (their fiber issue and US operations stop me from wanting to hold long term).  I have decided that if I can find companies I really like and good to great valuations I will purchase a small amount (2% of portfolio). Should market sell off I will have cash to buy more (I am currently 30% invested and 70% cash). Should markets go sideways or up I will be sitting on a nice portfolio of companies purchased at attractive prices. For me macro matters; however, valuations are not so high that I want be out of the market completely.

 

 

 

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Why do we always seem to get sidetracked in these macro discussions? Why not look to Buffett, the master himself?  He has said time and time again that investing is a little like playing golf.  You don't pick the holes, you play all of them and do your best.  I don't see any market timers close to the top of the Forbes 400.  Berkshire is pretty much fully invested right now.  I am also fully invested and wish I had more money to invest.  There are just so many incredibly compelling investments out there, companies that are clearly undervalued.  Could they go lower in price?  Sure.  But if you're buying $100 for $30, do you really care if it goes to $20 before it goes back to $100?  Yes, it would be nicer to buy it at $20, but that's where the market-timing folly comes in.  Just like you don't know whether it will go to $20 from $30, you don't know whether it will go to $15 from $20.  Meanwhile, you are pretty certain that it is worth $100.  A friend of mine always gets nervous when stocks go down and says, "It's OK if I miss the first 10% of a rebound. I'll make money on the remaining 50%."  In reality, he always misses on the big upward moves of bargain stocks.  After the first 10%, he says, "Well, maybe this is just a headfake. Let me wait a little more to make sure it doesn't go right back down." The moral? Forget timing the market or individual stocks. Buy them when they are undervalued and then wait/monitor.  Don't let some nebulous notion of "the market will go down" keep you away from the bargain that is right there for you to own.  By the way, cash is NOT safe!  Do you really feel rich if you own something that Bernanke can print in unlimited quantity any time he chooses?  I feel safer owning a piece of a good business at a good price.  Good luck!

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I think there are two fundamentally different points of view in this thread, and it has nothing to do with statistics, technical analysis and short term thinking:

- Many think things will eventually get back to what it was and better in a few years at worst. All of this was just a boom/bust cycle that's going back to boom. Like in the 70's. In this case there are definitely opportunities in this market.

- Some may think that this is not guaranteed and our road is more rocky. Then valuations are not this cheap. They want a higher margin of safety. It becomes harder to evaluate future earnings for many companies.

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Why do we always seem to get sidetracked in these macro discussions? Why not look to Buffett, the master himself? 

Remember too, Buffett did close his fund up way back in the day when he just did not feel comfortable in this (at that time) market. The problem today is he is way to big to do that. None of us here are that big.

Im going to bet had he been the size he was back in the 50s he would have taken that coarse again.

One word to all those thinking being a value investor is just buying and holding no matter what because the future will work itself out, comparing things to multiples of the past - we'll Im sorry, being a value investor to me is buying something at the lowest possible price relative to future earnings assuming these earnings are above US gauranteed rate.

 

 

I feel alot of people get to romantic about investing here.

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I think there are two fundamentally different points of view in this thread, and it has nothing to do with statistics, technical analysis and short term thinking:

- Many think things will eventually get back to what it was and better in a few years at worst. All of this was just a boom/bust cycle that's going back to boom. Like in the 70's. In this case there are definitely opportunities in this market.

- Some may think that this is not guaranteed and our road is more rocky. Then valuations are not this cheap. They want a higher margin of safety. It becomes harder to evaluate future earnings for many companies.

 

I think you just nailed it!

 

cheers

Zorro

 

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All we are talking about is finding 5-10 companies out of 10,000+ public companies that one understands and considers deeply undervalued.  All one needs in order to make a lot of money while maintaining reasonable diversification is 5-10 good investments at a time.  This should be doable in (almost) any market environment, but especially after the Dow has been flat for more than a decade.

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Remember too, Buffett did close his fund up way back in the day when he just did not feel comfortable in this (at that time) market. The problem today is he is way to big to do that. None of us here are that big.

Im going to bet had he been the size he was back in the 50s he would have taken that coarse again.

 

Buffett was buying as much Berkshire Hathaway stock as he could get while getting ready to close his Partnership.  When he took the helm at Berkshire, he never stopped looking for and making investments in cheap public companies, regardless of the market environment.

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Guest Dazel

 

Buffett closed his partnership during the gogo era...hardly the same as today...xerox et all were trading 50 times earnings....

One thing that should be noted is that for 17 years the dow was flat...ending in 1981...Buffett made a killing during that time as did Templeton and numerous other investors that ate Ben Graham's cooking. On the bright side Templeton looked for uncertainty worldwide..."There is always a bear market somewhere"...

 

Here are some eye openers for those that think we are overvalued.

1998-Coke $68

2010      -$54

 

2000GE-$50  pfizer-$60  Walmart-$70  Dell-$52 

 

2010  -$15          -$18              -$54      -$14

 

 

History will look back at the time we are in now as a disaster....but it all depended on what you owned!

 

Dazel.

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Buffett closed his partnership during the gogo era...hardly the same as today...

 

He closed his partnership not because it was a go go era but because everything he would like to buy was priced too high relative to what he would reap from it in future earnings.

Calling it a go go era makes no difference.

 

but it all depended on what you owned

absolutely

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I do not know what comprises the ECRI index; but, I have a feeling it's probably similar to the LEI.  The LEI has been sinking alongside the ECRI, albeit not as quickly; however, judging by the components of the LEI that have gone down in the past couple of months, I wouldn't be worried.  One of the components of the LEI that have dropped a bit lately is stock prices.  Does stock indexes wag the economy, or vice versa?  No one really knows.  Also, judging by the OP's original post, the ECRI has had severe declines during major stock market crashes.  This is telling evidence that the ECRI may be heavily weighted towards stock prices.  The LEI's weighting in this regard is not so pronounced.

 

I'm forecasting real US GDP growth to slow tremendously by the second part of this year to 2%.  That's a 50% reduction from current real GDP growth rates.  The other components of the LEI that have been negative are not worrisome to me.  They are pretty negligible. 

 

TL;DR = Economy is fine.  Growth will slow in second half of 2010, but it's nothing to worry about.

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Buffett closed his partnership during the gogo era...hardly the same as today...xerox et all were trading 50 times earnings....

One thing that should be noted is that for 17 years the dow was flat...ending in 1981...Buffett made a killing during that time as did Templeton and numerous other investors that ate Ben Graham's cooking. On the bright side Templeton looked for uncertainty worldwide..."There is always a bear market somewhere"...

 

Here are some eye openers for those that think we are overvalued.

1998-Coke $68

2010       -$54

 

2000GE-$50  pfizer-$60   Walmart-$70  Dell-$52  

 

2010   -$15          -$18              -$54       -$14

 

 

History will look back at the time we are in now as a disaster....but it all depended on what you owned!

 

Dazel.

 

The other side of that is questioning whether they were fairly valued in 2000. And Dell's business has deteriorated in recent years. GE has struggled as well. Wal-Mart is probably a good buy right now, although their growth rate has really slowed (which is just the nature for a retailer of their size).

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For what it is worth (from an old f--t's memory), It was called the Go Go Era, the fund managers were called "gunslingers" and every fund had to have the "nifty fifty".  Most of the funds were proud of their short term trading.

After the bust, you could shut your eyes and throw darts and find great companies selling at PE's of 2-3.

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