November 2007 Market Timing Update
"There is a very easy way to return from a casino with a small fortune: go there with a large one. "
|The Professional View
The timing model remains in bullish territory and the winter season approaches, and the bull is set to run further. Looking through binoculars, we still can't see a bear market approaching. A bear market would mean a decline of 20% or more in the S&P 500.
Bob puts it best:
"...we view the cacophony of financial media stories on this subject as highly suspect."
The housing recession and high oil prices will continue to slow economic growth. 2007 growth is expected to be in the range of 2.5%. 2008 growth is expected to be a bit lower, in the 1.7 - 2.7 range.
The economy is not firing on all cylinders as housing and the US automobile market continue to perform poorly. High oil prices have not yet made their way through to the gas pumps and home heating bills. Consumers will have to dig deeper into their wallets to meet the rising cost of energy.
This is partially offset by higher wage and salary growth due to the strong demand for employable workers.
Headline inflation is expected to stay within a range of 2.5 - 3.5% into 2008.
The CPI has risen to a level of 2.8% on a year over year basis even though energy has risen to 5.3% and food to 4.5%.
The Fed appears to be prioritizing economic growth and it is hoped they will be more timely in their responses when such conditions warrant.
Long term interest rates are expected to remain in the 4.5 - 5.0% range if the expected real GDP numbers going into 2008 are correct and the core inflation numbers remain as published.
Further reduction of Short term interest rates is still up in the air. December data on new jobs and jobless claims will provide key input for the possibility of another rate cut.
S&P Operating earnings are currently valued at 16.5 times earnings, which is in the middle of an acceptable range of 16 - 17. This is well below a range of 18 - 19 times earnings which one would expect to find during periods of low inflation.
The current estimate for 2008 S&P 500 operating earnings is $99.00. This translates into an S&P 500 index reading of at least in the mid 1600's for 2008.
No changes to portfolios.
The market is expected to set new record highs going into 2008 with slow economic growth, low interest rates and low inflation.
The housing problem should help ensure the economy does not overheat in the foreseeable future and keep the bull market intact well into 2008.
Dollar Cost Average in for new money if you don't see a buying opportunity drop in the S&P mid 1400's.
Bob continues to be a happy camper.
Other than being faced with the prospect of going up to the Yukon, again,
October sure was a bang-up month.
I closed the month with a weighted YTD average of 19.76% for funds held the entire year and an average of 17.35% for everything.
This is currently beating the pants off Bob's portfolio which is showing 14.19% for aggressive growth, 11.97 for long term and 9.23 for the retirement portfolio.
I finally dumped STSVX in favor of PDPPX, a recent large cap addition to the 401K which actually looks like a pretty decent fund. 2.1% gain YTD just doesn't quite cut it.
This has increased my Large Cap US holdings to 28% and Small Cap US has decreased to 3.5%
Owens Corning (OC)
Owen's Corning had their third quarter conference call.
They seem to have had a pretty good quarter all in all. Losses in some sectors and gains in others. Their CEO is retiring. I liked what they had to say but I lightened up a bit a while back.
I sold half of my position in Owen's Corning a couple weeks ago for what might be a better opportunity:
Wireless Ronin (RNIN)
It started looking like a good time to buy back in to Wireless Ronin. The stock dropped to the low 3's and that looked like a good buy-in point to me. The company stock dropped after less than expected earnings results and it looks like it is bottoming or has bottomed.
The company had some pretty decent headlines the last couple months.
I noticed none of the institutional and mutual fund holders have sold or reduced their positions. It will be interesting in seeing if this company continues to gain traction. Their earnings results come out Thursday, November 8. I think I will say three Hail Marys Wednesday, November 7. Here is the conference call.
Prediction for the Final Two Months of 2007
I think the market will close 2007 at record highs and here is why:
It starts with the 60 Day Put-Call ratio, which is staying at record highs. The higher the reading, the higher the amount of overall negativity, or bearish opinion in the market.
What does the Mass Media focus on and what are you bombarded with on virtually any channel?
Negativity - it is pervasive.
I used to kind of like CNBC but anymore it makes me gag, what with those fresh young faces reading off questions from a teleprompter to their guests and being unable to ask any meaningful follow-up questions or present a cogent argument to the contrary when they get some geek on from the Doom and Gloom crowd crowing "The Sky is Falling! The Sky is Falling!".
I guess that will be fixed one of these days with a AI teleprompter. That way the show hosts won't have to think at all.
I finally flipped the channel off when one of the show guests made a reference to condiments.
Noticing the blank look on the host's face, the guest said, "You know, salt and pepper?"
Getting a little off topic here.
Earnings in general have been stellar all year. Inflation is low and the economy is chugging along in a positive direction.
Lots of people are making lots of money.
Now, suppose you are an institutional investor who has bought into all the negative rhetoric over the last year and you have the bulk of your client's assets in the relative safety of bonds. You finally lift the shades and notice a number of your competitors are doing considerably better than you.
Your performance is going to be published at the end of the year along with everyone else and the results for you are going to look rather embarrassing.
Best to buy back into the market and at least make it look like you had a clue for part of the year.
Institutional buying will further push up stock prices and barring any new catastrophes, people who stayed in the market for the entire year of 2007 will be wearing watermelon smiles on New Year's Eve.
As always, do your own DD and if I haven't mentioned it before, there is a fair amount of Irish in the family so I do enjoy
a little béal ónna.