Special PFG Client Update
In the last five weeks the landscape has changed for investors due to the situation in Europe and the economic numbers in the U.S. The elections this past weekend in Greece and France have the market on edge as fears of more frivolous government spending arises along with fears of a continued collapse of sovereign debt.
I felt it was time to take a step back and analyze the big picture to help explain the situation to clients and subscribers.
1. Europe – The situation in Europe is ever-changing. In the last few weeks the elections in Greece in Europe have the potential to have anti-austerity as the platform versus cutting government spending. In Spain the government nationalized the 4th largest bank. The U.K. is officially in recession. The news is not positive and it has made its way across the pond and put a lid on the early 2012 stock market rally. This is a situation I consider a negative for the market, but that could change depending on several government decisions.
2. Employment – The unemployment number remains just above 8%, however the real number is likely much higher due to the manner in which the government tallies the numbers. The participation rate (percentage of working age people in the US that have jobs) is at its lowest rate since late 1981. This is not a good number. The one silver lining is that production remains decent despite the large amount of unemployed.
3. Technicals – The chart shows a 5% pullback from multi-years for the S&P500 and that has revealed some cracks in the foundation, but it is not yet falling apart. The 1343 level on the index on a closing basis is a level that must be watched closely in the short-term. That level is the closing low on 3/6/12 and the intraday low on Wednesday. Keep in mind the market is only 5% from a multi-year high – you must view the big picture.
4. US Economic Numbers – The economic numbers released by the government and independent firms have been mixed over the last five weeks. It is true that the majority are losing steam. It is also true that most are not at the point of pointing to a recession. The question that no one can answer today is if the slowdown is temporary or the beginning of a new trend. This is one area we watch closely every day.
5. The Fed – Do not fight the Fed is the mantra you have to take as an investor. You may not agree with the moves or lack thereof by Bernanke and his cohorts, but do you want to be right or make money? The likelihood of QE3 from the Fed continues to increase and if such an act takes place expect the market to rally to new highs. Our best guess is that QE3 occurs at some point this summer and stocks rally on the news.
6. Corporate Profits – The first quarter earnings season was a pleasant surprise and US corporate profits are at the best level ever. That statistic is touch to argue with and is one reason why stocks have the ability to move higher. At the end of the day, stocks move higher based on earnings.
7. Investor Sentiment – The latest AAII reading shows that investors are at the most bearish level since last October. So why is this bullish? Because we take the contrarian view. Similar to when our phone rings often with clients concerned about the market – it is often time to begin buying. With the internet, financial TV, and other media outlets it creates everyone to be on one side of the trade. Typically that trade is too late and it is better to go against the crowd.
8. Valuations – With our prediction for earnings of between $105 - $110/share for the S&P 500 in 2012 the P/E ratio based on the middle is 12.6. Well below the average of 15. For the S&P to get to the average P/E ratio it would put the index at 1612 – a new all-time high.
To make the update easier to understand I color-coded the 8 topics. The two red are negative, the two orange or moderate, and the four green are positive. The green outweigh the reds and therefore we continue to stand firm in the bullish camp today.
Sincerely,
Matthew D. McCall
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