Let Them Eat Chocolate

Republicans and Democrats have yet to come to an agreement to avoid the so-called fiscal cliff.
The dispute involves whether to increase taxes or cut spending and to what degree to do both. Regardless of the outcome of these discussions domestic economic growth is bound to decelerate both options will help cut the huge amount of government debt however each will cause consumer spending to drop, job losses and lower business investment thereby lowering US GDP output.
Traders on Wall Street have been speculating on whether a deal might be reached thereby causing great fluctuations in the stock market, however the ultimate result of these discussions will surely mean pain for the US economy.
The market is currently trading at about 10 times earnings making it quite attractive and undervalued assuming forward earnings estimates are correct and that growth will come as analyst predict.
Corporate earnings fell 4% in third-quarter and are expected to rise in the coming quarters. Over the next four quarters earnings are expected to increase on average 4% according to analysts estimates
Once again in my opinion those estimates are overly rosy at best I see economic growth increasing by 1.5% to 2% over the next year.
Congressional leaders will do their best to push economic growth along regardless of their intentions with the deficit.
Based on my estimate for forward earnings growth I put the S&P 500 trading at about 14 times earnings slightly below the markets long run average so in my opinion the market is neither cheap nor expensive.
I continue to remain heavily invested in cash in the event that congressional leaders botch this completely and send the US economy into a recession again. I still believe we are a few years out from seen a sustainable increase in stock prices and believe that the current fluctuations in the market have been caused by nothing more than free money from the Federal Reserve finding no better home.
Government must cut spending including entitlement programs and it must raise taxes from a broad-base of taxpayers in order to pay down the debt which becomes the country's major problem for the future.
It is going to take some short-term pain for the markets that has not currently been reflected in market prices. I'm waiting for significant decline in the S&P 500 to below 1300 before I'm going to get back into the market.
It is only when we get to see the actual details of the deficit reduction strategies when the market will begin to realize economic growth in this country is not going to be his fast as many analyst predict.
On a side note we just bought some shares of Hershey company HSY for my girls after visiting Hershey theme park. Most definitely a recession resistant industry. Almost everybody loves chocolate!

By the way please forgive any typos or misspellings as I did this blog posting completely with voice recognition software.

Big Waves, But A Dead Calm

It's been awhile since my last post and I haven't taken any investment actions in that time. Here's why.

We've found ourselves in a bit of a market trough with the S&P 500 index trading (albeit with volatility) between roughly 1250 and 1350 since the beginning of the year. In my last post I indicated the swing-point on my investment decisions was 1250 based on my tempered forecast of global earnings rates for the year ahead. I had parred back some holdings and continue to sit on a pile of cash earning very little.

In fact the only bright point about today's market environment is the low interest rates being offered by banks, which I found too attractive to pass up. We're refinancing our house yet again and saving hundreds in monthly mortgage expense. If you haven't already, and sit with a rate north of 4.5%, I'd suggest you look into it.

The market is currently forecasting a return to growth in the 12 months ahead, according to the consensus S&P 500 earnings forecast for U.S. companies. That makes the S&P index of 1354 roughly valued at 13 times forward operating earnings, which is considerably less than the long-term average of 17, which would put the S&P index closer to 1700. So why am I not excited about this?

Well first of all, I'm not in the camp that U.S. earnings growth will surge to 4% in the second and again in the third quarters of this year. I'm factoring in much more conservative estimates. Second of all, I'm not expecting the market to trade anywhere near the mean P/E ratio, given uncertainty in Europe, U.S. elections, jobs, the possibility of huge tax breaks not being extended next year, global political tensions . . . the list goes on.

Here's where I'm at. I'm thinking flat to slightly higher earnings ahead. I don't see the 4% growth analysts are forecasting. For my money, I'm thinking S&P 500 component earnings of $94 for the twelve months ahead. I'm also going to stick with a cautious multiple of 14 on my estimate, which places the S&P index at about 1320.

 It's up from my previous view, based on some strength in early second quarter earnings reports. But remains below the current market. So below 1300, I make look to dip my toes back in the waters with a quick exit strategy in mind. Times like this I wish I took some surfing lessons.
 

Market getting frothy, time to ring the register

I've started taking some chips off the table. Already cash heavy. But given the recent market run-up is not supported by fundamentals, I'm seeing as this as a good time to take some profits.

I wrote last that I believed the S&P pivot point was 1,250 based on my forecast for global earnings growth this year. I continue to hold that line and my conviction is strengthened by a recent downgrade in growth estimates by global powerhouse China.



Despite signs of emerging growth in the U.S. there are just too many uncertainties (Greek default, contagion spreading to Portugal, Italy, war with Iran, Syria, U.S. election, escalating gas prices) to warrant being fully invested right now.

I continue to believe the U.S. is the safest bet for equities. But my long-term forecast envisions other countries, including Australia, Canada, Brazil, China, even some African nations taking global economic market share. I'm working to put together a cost-effective portfolio that represents significant stakes in these countries.

Mattress is getting even lumpier thanks to the equity run-up.