I covered the cautious technical picture in the 2/1 post (below).
Today, I focus on fundamentals and a bit on psychology. The SP 500
closed today at 1063 after a sharp fall. But the market has really
spent most of its time closer to the 1100 level for a good several
months. At 1100, the market is discounting 12 mos. earns. of $67.
That's about where the consensus forecast is for 12 mos. earns.
through mid-2010. So, I view the market as having stalled out
after it discounted earnings recovery out to the middle of this year.
For my part that represents reasonable behavoir, as it gives time
for the underlying trend of earnings to catch up and "verify" the
As I discussed in the 2/1 post, I think the first leg of this cyclical
bull market was completed in recent weeks, with the sharp
ascent reflecting rapidly recovering profitabilty from a first
ever small operating loss for the "500" in Q 4 '08, to a quarterly
net per share earning power of around $17 currently. The
recovery move was accomplished by the very aggressive cost
cutting of the component companies, advancing sales volumes
off a low base, and of course, the elimination of the bankrupt from
As we go forward, we will see the development of modest yr/yr
sales growth spread over reduced cost structures, which will
support further earnings recovery over the second half of the
year. the cost cutting is a done deal, so now the focus for investors
is on the sales recovery. At this point, the leading economic
indicators suggest that sales will continue to recover through
the year on a yr/yr basis, but do not as yet provide signals on
the momentum of sales growth after mid-year. Again, it is
understandable to me why the market would pause as it has.
From a psychology standpoint, I think it is also reasonable for
investors to get a case of the shivers in the wake of a severe combo
recession / financial crisis. It was a harrowing time and
subsequent concerns about growth or credit viability can work to
re-generate some fears as mentioned back in the 9/18 piece
when I first suggested some caution on the market. The classic
example was the 1932 - 33 period when the market rallied
furiously off its low in the summer of '32, was then engulfed again
by fears that hung around for more than six months, and with this
to be followed by a double to the upside in short order.
I think the economy is going to do ok and that the market advance
will resume. But I do not know whether the current sabbatical will
last until tomorrow morning or whether it will persist for a number
of weeks. The current round of "hot" shorter term cycles (13-15
wks) suggest a bottom this month. We'll see.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!