The Enterprising Investor’s Guide 2-23-09

The price-to-peak earnings multiple plunged to 8.6x, which is a new low on a weekly closing basis. Equities took a major hit last week with the S&P 500 falling nearly 7%, approaching its lows from last November. Financials took the worst of it as nationalization rumors swirled around Citi (C) and Bank of America (BAC) late in the week. These stocks had a slight recovery when the Obama Administration reasserted its opposition to any nationalization, if at all possible.

The sharp decline in the equity markets was a signal that the Administration’s bank rescue plan, economic stimulus plan and mortgage relief plan have not been well received in the marketplace. So far, these efforts have not had the intended effect of stabilizing the markets. Instead uncertainty has only increased as the plans are massive in scope and do not represent the “new type of thinking” that was promised. Markets hate uncertainty, and when combined with the really tough macroeconomic data that we saw last week, stocks can fall rapidly. The near term direction of the market is uncertain and fraught with risk.

S&P 500

The percentage of NYSE stocks selling above their 30-week moving average has dropped to 8.1% this week after last week’s sell-off. The market is fighting a crisis of confidence right now as the first round of bailouts have yet to counter the banking crisis. The banking system is going to need additional re-capitalization in order to remain solvent going forward and with the first half of TARP funds having already been spent, the stated goal of encouraging new lending proved elusive in the last quarter. The mortgage bailout plan will make further investments in Fannie (FNM) and Freddie (FRE), the two firms at the epicenter of this mess which began almost a year and a half ago. The automakers met with congress last week to discuss their viability going forward and instead of showing progress towards solving their problems, once again simply asked for more time and a lot more money. Congress finally did acknowledge that automaker bankruptcy is an option, but we have a hard time believing they mean it. There needs to be some semblance that these bailouts are working in order to assure people that the government is not throwing good money after bad.


As for our asset allocation model, because the percentage of target allocation is based on both sentiment and valuation levels, we remain at a bullish position for long-term investors. That being said, we understand that the market may still have room to fall to new lows in the coming months. The Fed meeting last week took a more bearish perspective to a recovery in 2009, as many economists are backing off that prediction until 2010. Furthermore, the National Association of Business Economists echoed the Fed’s statements saying that unemployment could reach 9% and the economy will shrink by 1.9%, even as Obama’s stimulus plan adds a 1% boost to GDP. We keep hearing that “this time is different” and that may be true, but that does not mean that the American economy will not eventually recover. So, although we fully expect wise investments made today to be substantially higher in the next two or three years, the same cannot be said about the next two to three months.

Equity Allocation

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.

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