The Enterprising Investor’s Guide 3-16-09

The price-to-peak earnings multiple rose to 8.5x this week. This is at a level we would consider very cheap compared to historical norms. The relentless plunge downward in equities abated during the past week because of a slew of positive developments. After hitting a more than 12 year low on Monday, the markets turned around on Tuesday and finished the week with four straight days to the upside. There was good news from the battered banking sector as Citi (C), Bank of America (BAC) and JP Morgan Chase (JPM) all reported that they were profitable in the first two months of the year. In Citi’s case, a leaked “internal” memo stated that the first two months of the quarter were the best since 3Q 2007. Now, nothing has been made official, but this sort of unexpected good news is what the market really needed to break out of its funk.

Furthermore, there were positive developments emanating from Congress last week as well including hints that there could be some relaxation of the mark-to-market accounting rules which have forced companies holding illiquid assets to take massive write-downs. Any change in these rules would likely be a positive from the banks’ perspective. There was also talk of reinstating the up-tick rule which would place limits on short selling. While neither of these ideas has been made law, the fact that they are on the table is positive for financial stocks and equities in general.

S&P 500

The percentage of NYSE stocks selling above their 30-week moving average rose to 10% as of the end of last week’s trading. As long time readers already know, we use this metric as a proxy for investor sentiment in general. Sentiment received a decent boost in the last week, as we would expect after ending a string of four straight weeks of market declines. During that time, it was extremely rare for the market to have two consecutive days of positive trading; last week, the markets were up four days in a row. This is definitely welcome relief for investors weary from losses, yet sentiment remains extremely low. While we are hopeful that the streak of positive returns will continue and that we have seen a market bottom, with economic news still overwhelmingly bad, it is likely too soon to signal “all clear”. Investors’ risk tolerance remains low and credit spreads show that it could take a while before stocks fully recover.


Our asset allocation stance remains cautiously bullish. Employing a long-term, value-biased research methodology, we believe that current conditions are right for buying. Valuations are lower than at anytime in the last two decades as is investor sentiment. Value investors have to be contrarian in situations where fear and uncertainty have gripped the market’s psyche. Over the long haul, we are confident that this is a justifiable time to have exposure to equities. However, we know that one good week does not mean that we have hit the bottom. On Monday of last week, commentators and pundits were talking about the possibility of Dow 5000–or worse. Many of the same concerns that plagued the market last week are still relevant today. It is possible that last week’s rally was just a “short squeeze”; where markets show slight signs of improvement, forcing short sellers to buy stock to cover their positions and propelling the market to greater gains than would have otherwise been justified. We hope that this rally is sustainable, but would not be surprised to see another leg down which tests the established lows. That being said, there is much less downside risk now than there was just six months ago. So, our advise continues to be: stay long but fasten your seat belts.

The Enterprising Investor’s Guide 3-16-09

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

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