Archive for February, 2009

The Bear Case

Back in January, I wrote that based on historic P/E ratios of around 10 at the bottoms of major bear markets, the market may drop another 50%.  This article makes essentially the same argument and makes a case that S&P can end up 35% lower from today’s levels.

Of course, no one knows whether such dire predictions will come to fruition.  It is my belief, however, that it pays to concentrate on individual stocks in your own portfolio rather than on general market.  And there are many stocks out there today with P/E ratios significantly below 10.  Also, overall P/E ratio is currently inflated by huge losses from financial companies, and therefore is not truly indicative of market valuation.

February 27, 2009 at 2:24 am Leave a comment

Is Garmin about to Head North?

The leading GPS maker Garmin (GRMN) has been hit very hard in this recession.  In addition to suffering along with other electronics manufacturers due to declining consumer spending, Garmin’s stock was affected by twin fears of GPS commoditization and competition from cell phones.  As a result, its stock now fetches only about an eighth of its high back in 2007.

Today, Garmin posted sharply lower earnings and revenues for Q4 2008, but these were not as bad as expected.  In addition, the company reduced inventory and suffered only a slight decline in margins, which is very impressive in current environment.  It also gained market share — indeed, its main rival TomTom lost money last quarter and warned that it could be in breach of its loan covenants from the purchase of TeleAtlas (for which it had to pay a very price forced on it by Garmin’s bidding war).

It is clear that Garmin is going to emerge a much stronger company at the end of this recession.  Take a look at this post for more discussion on its prospects.

February 24, 2009 at 10:01 pm Leave a comment

Dollar-cost Averaging through a Crash

In my previous post, I wrote that it took the market 25 years to recover to its 1929 pre-crash levels. However, if you didn’t start out with a lump sum, but instead used dollar-cost averaging to buy into the market during this period, you would have generated some nice returns. This excellent post shows the calculations.

With current elevated market volatility, dollar-cost averaging makes even more sense as you are likely to pick up more shares at low prices. That strategy should work well in this environment — provided, of course, that you believe that the market will eventually recover!

February 24, 2009 at 4:26 am Leave a comment

Nearly 12 Year Low

Well, November 20 lows didn’t hold today, and both S& 500 and Dow Jones closed at nearly 12 year lows, at early 1997 levels.  The Nasdaq so far managed to perform a little better and avoided setting its own low mark.

There were only two other periods in stock market history when stocks moved sideways for an extended period of time.  It took the market 25 years to recover to 1929 levels after the Great Depression (although stocks spent most of that time climbing since hitting bottom in 1932).  The other period on the road to nowhere was from 1966 to 1982.

No one knows how long this period will last.  It is likely, however, that markets will continue its downward movement at least for the short term.  The pervasive pessimism and the loss of key support today could make the market feed on its own negativity for some time.

February 24, 2009 at 4:03 am Leave a comment

Back to November

About a month ago, I wrote that a re-test of November’s lows was possible.  Well, we are at that point today, at least for Dow Jones that closed just a fraction above its closing price of November 20.  The current concern is the lack of details in the government’s banking plan about what specific steps are going to be taken to shore up the financial system.

Despite the drop, most economists still predict slow 0.7% growth in GDP in the third quarter.  The economy is expected to continue shrinking in the first and second quarters.  Typically, stock market anticipates recoveries and bottoms out about six months before the recession end.  However, many commentators contend that since this downturn is so severe, there will be no sustainable rally until actual evidence of a recovery emerges.  We’ll have to see, but “it is different this time” types of predictions usually don’t pan out.

February 18, 2009 at 5:33 am Leave a comment

The Earnings Season

The earnings season for the last quarter of 2008 is drawing to a close, and, as expected, the results were not pretty.  After the worst January in history, S&P 500 is down 8.5% so far in 2009, on top of terrible losses in 2008.  Unlike 2008, however, where the carnage was spread across all sectors, 2009 presents a different picture.  About a third of S&P 500 companies, specifically in technology and healthcare sectors, are actually up for the year.  Financial sector, meanwhile, continues its steep slide.  In any event, such disparity in performance presents some opportunities for stock pickers.

Here are some of the companies that I track that gave upside earnings surprise and provided higher guidance going forward:  Akamai (AKAM), Buffalo Wild Wings (BWLD), Blackboard (BBBB), Dolby Labs (DLB), Nuance Communications (NUAN), and Netflix (NFLX).

February 16, 2009 at 11:49 pm Leave a comment

Foreclosures Leveling Off?

This chart shows foreclosure activity for the last two years.  The good news is that for the last six months the foreclosure rate appears to be stabilizing.  We need to see a consistent downward trend, however.  A decrease in foreclosure activity is essential for the housing market recovery, which itself is at the root of current economic crisis.

Take a look at this article from CNN Money for more discussion on this topic.

February 12, 2009 at 7:48 pm Leave a comment

Cash Is King

For the last year and a half, that old adage was certainly true.  As the market continued its downward trend during that time, more and more people took the money out of equities and put them in safe money-market accounts (and/or mattresses), bringing total cash levels to unprecedented highs (see my previous post).

Those of us who were smart or lucky to get into cash a year ago are certainly feeling very clever and comfortable now.  But cash is not going to be king forever.  While inflation is nowhere in sight these days, and, moreover, deflation is more of a current concern, the fact the government is spending trillions of dollars to fight the financial crisis will undoubtedly bring inflation back to life.  Time will come when that comfortable feeling of sitting on a pile of cash in the mattress will not be so comfortable anymore.

February 10, 2009 at 7:18 pm Leave a comment

Stocks vs. GNP

Below is the graph of total stock market capitalization vs. Gross National Product.  According to Warren Buffet, stocks become attractive investments when total market cap is in within 70-80% of GNP.  Right now, we are in the middle of that range, at 75%.

Note, however, that based on this metric, the ratio still is higher than it was during World War II, or during the recession in 1980, when it stood around 50%.  To get to that level, the market will need to drop by another third.

For more discussion, take a look at this article from Fortune.

February 4, 2009 at 6:59 pm 1 comment

Blog Author

Leon Shirman's long-term investment philosophy is summarized in his book, “42 Rules for Sensible Investing”, also available from Amazon.


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