Individual investors are bullish... According to the American Association of Individual Investors (AAII) Sentiment Survey, 48.5% of respondents think stocks will rise over the next six months. Just 18.9% think they'll fall, and the rest of those surveyed (32.7%) are neutral on the market.
Famous fund managers have made bullish calls recently, too... About a month ago, Doug Kass of Seabreeze Partners said he thinks the S&P 500 will trade above 1,525 this year. The market is up since then, but 1,525 is still more than 15% above current levels and roughly 42% above October's bottom of 1,074.
Kass made his call not too long after Traxis Partners' Barton Biggs told Bloomberg, "It's hard to get really bearish," and that the global economy was doing well, except for Europe.
And investment analyst Norman Fosback says this is the most bullish setup he's seen in the stock market since 1990 – and he's been studying the market for decades. Fosback recently wrote, "The market's fundamental position has evolved to the most favorable alignment in 20 years."
Fosback uses his own proprietary system, based on stock prices, price-to-earnings ratios, and the Federal Reserve's interest-rate policy. He says corporate profits are at all-time highs, interest rates are low, and stocks are selling for 1991 prices. Fosback expects stocks to be up 19% over the next 12 months and 89% over the next five years.
You'd think more professionals would be like our own Jeff Clark. Jeff is suspicious of the market right now... though he admits the recent price action is "undeniably bullish." Jeff told readers in today's S&A Short Report market update he favors the downside right now, but isn't putting on any new trades today.
Jeff sees several trades setting up well, but he's not going to make a new recommendation until the market stops giving mixed signals. Jeff's one of our best traders. His S&A Short Report option-trading service produced an impressive 199% annualized return last year and earned a coveted A+ in our annual Report Card. To get access to the S&A Short Report and take advantage of Jeff's next recommendation, click here.
Mr. Market might be changing his tune (just in time for all that bullishness to make a little less sense). UPS, the world's largest package delivery company and a popular economic bellwether, reported fourth-quarter sales 2% below the average analyst expectation in a recent Bloomberg survey. I'm not sure how that's important... but the market seems to think it is. The stock is down today. You'd think it would rise, since the news is good...
It's funny how the market always thinks the analysts are right and punishes the stock, rather than the much more likely conclusion – that the analysts are unable to predict any company's sales with precision.
It's as though UPS's 6% rise in sales, 17% rise in operating profit, and 21% rise in earnings per share don't mean anything at all. At least that's what today's trading suggests. I mean... who cares what some Wall Street analyst thinks of UPS? Don't you care much more that the world's largest package delivery service is firing on all cylinders? And didn't anyone hear the chief financial officer say cash flows will "remain strong" and that it'll likely buy back $2.7 billion of shares this year, about the same amount it repurchased last year? Apparently not. The stock is down 1% today.
And RadioShack shareholders aren't feeling it at all... They lost 30% of their money today. The electronics retailer reported yesterday that it expects fourth quarter earnings of $0.11-$0.13 per share. That's about 75% below 2010 fourth-quarter performance of $0.51 per share. The company also said gross margins are expected to contract from 41% to 35%... and it's suspending its share repurchase program. The stock, which closed Monday at $10.23, opened today at $7.21 and didn't budge...
Best Buy, the biggest electronics retailer in the world, also fell 5% today, too. These are not wonderful businesses. You can get most of what they sell from places like Target and Wal-Mart... or you can just sit at home and order it from Amazon.
And how am I (Dan Ferris) feeling? Am I bullish? Well... overall, I'm agnostic about the market. I don't care which way it goes. I just want to find great businesses trading at prices cheap enough to provide a margin of safety and a great return. I love it when the market tanks good and hard because I get a chance to buy stocks at prices that make sense. Most folks just buy high and sell low. God bless them. Without the great herd of "market followers" obsessing about price quotes, reading all the headlines and hanging on every word uttered on CNBC, I'd have no one to sell to at the top or buy from at the bottom.
The only thing I want to know about the overall stock market is whether it's cheap or not. Right now, the S&P 500 is trading for a little more than 14 times trailing 12-month earnings (estimated earnings through March 31, 2012). The long-term average is a little more than 16 times earnings, so the market is somewhat cheap right now, but it's not the kind of cheap you get at big bottoms, like, say... 1982. Back then, the S&P 500 was trading well below 10 times earnings. Now THAT is a cheap market! We're not there right now, and so...
It's no surprise right now that my research partner, Mike Barrett, and I are having trouble finding many great bargains among the world's better businesses. We only like to recommend the best businesses in a given industry. We do this because it's the safest, surest way to make money in stocks. We know most of our readers are not professional investors. Value guru Ben Graham offered what he called the "principle for the untrained security buyer."
By "untrained security buyer," Graham meant most investors are not professionals and should recognize that limitation. In fact, you can exploit it as an advantage if you invest by Graham's principle. In his classic investor bible, Security Analysis, Graham said untrained security buyers should "never put money into a low-grade enterprise on any terms." To put it another way... never buy a lousy business, no matter how cheap it gets. If you focus all your investment activities on the best businesses, you'll get much better results than folks who chase every hot trend.
One reason for this is wonderful businesses are easier to understand and analyze. I was recently re-reading one of my favorite investment books – Joe Ponzio's F Wall Street – and was reminded of this... Ponzio likes to determine a company's profitability using Warren Buffett's "owner earnings" calculation, which involves some complication and can change from industry to industry. You start with net income and add back various noncash charges. The point is to see exactly how much cash a company generates for its owner/owners. Ponzio pointed out that with great businesses, the much simpler free cash flow number tends to work well as a substitute for owner earnings. Free cash flow is simply operating cash flow minus capital expenditures.
In other words, what you see is what you get with wonderful businesses. There's no need to get into complex financial analyses. Anyone with a fifth-grade education can do the math.
That's a far cry from what it takes to understand lousy businesses. To see this in action, you ought to check out Greenlight Capital founder David Einhorn's short-sale thesis for Green Mountain Coffee Roasters... or the entire book he wrote about his short sale of Allied Capital, called Fooling Some of the People All of the Time.
In both cases, Einhorn shows you companies that many investors thought were stable, reliable businesses but turned out to be ultra-complex, scandal-ridden schemes that relied on questionable accounting practices. You don't find that sort of thing with wonderful businesses. When you're running a wonderful business, making tons of money, and growing every year, you've got nothing to hide.
I've got a whole list of wonderful businesses in The 12% Letter. They're the World Dominating Dividend Growers. They're not complicated accounting nightmares like Green Mountain and Allied Capital. Nor are they dying retailers like RadioShack and Best Buy. These businesses continue to grow and thrive, despite the worst economic situation since the Great Depression. To learn about The 12% Letter and discover a whole new world of investing, where you focus entirely on the very best businesses, click here.
Given our long history of global warming skepticism – and our readers' complaints that all scientists agree with Al Gore – we found the following Wall Street Journal piece interesting...
The editorial, titled "No Need to Panic About Global Warming," was written and signed by 16 scientists who dispute global warming. The group claims "a large and growing number of distinguished scientists and engineers do not agree that drastic actions on global warming are needed."
The proof, the scientists say, is "the lack of global warming for well over 10 years now." But they note many scientists are afraid to speak out against global warming for fear of retribution... In 2003, Dr. Chris de Freitas, the editor of the journal Climate Research, published a peer-reviewed article saying the recent warming is not unusual based on historical climate changes over the past 1,000 years. As a result, Dr. de Freitas endured demands he be fired from his editorial job and his university position. (He ultimately kept his university job.)
The reason for this pro-global warming world stance, according to the editorial, boils down to money and government control...
Alarmism over climate change is of great benefit to many, providing government funding for academic research and a reason for government bureaucracies to grow. Alarmism also offers an excuse for governments to raise taxes, justifies taxpayer-funded subsidies for businesses that understand how to work the political system, and lures big donations to charitable foundations that promise to save the planet.
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New 52-week highs (as of 1/30/12): Monsanto (MON).
Please write in and tell us what you think is the best business in the world right now. Not the best stock to buy for the next six months – the best business. Write us at feedback@stansberryresearch.com.
"I had to write and comment on your coverage of the O'Malley tax plan. I am a working professional, middle/upper-middle class worker. Former electrical engineer (21 years at NGC) and now a financial analyst at Maricom/CSC. I have never had earned income of six figures. Occassionally have other (unearned) income that may put me slightly over that threshhold. I am not wealthy. In fact, at age 44 my net worth is roughly zero (thanks to the plummeting real estate values). I have a mortgage, two car payments and more credit card debt than I should (I know it is my own fault, but I have a budget/plan to turn things around). If the state of MD increases my tax burden, that will directly affect my ability to get out of debt and save for retirement. Today $100K gross income does not make one 'wealthy.'
"O'Malley also proposed increasing the sales tax from 6% to 7%. It was only about 3-4 years ago that it was increased from 5% to 6%. That would have been a 40% increase in only 4 years. Sales taxes are extremely regressive, affecting lower income persons more heavily. Fortunately, enough legislators expressed outrage that O'Malley quickly backed down (for now)!
"This state is run by tax and spend liberals who never met a tax they didn't like. Instead of reducing spending and growth of our beauracracy, they just want to steal more from hard working people that are barely getting by.
"Shove it where the sun don't shine O'Malley. I will never vote for you or your cronies! S&A team, keep up the excellent work!" – Paid-up subscriber TJB
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
January 31, 2012
AAII way bullish... Kass and Biggs bullish... Fosback: Best market since 1990... Jeff Clark sees trades setting up... UPS: analysts vs. reality... RSH: -30% today (ouch!)... Global warming deniers... Coming soon: A trillion new euros...