Thursday, August 4, 2011

Recent Panic and Fear Are the Only Things Similar to 2008

After today’s 5% drop, the markets appear to be pricing in a repeat of 2008. CNBC’s website is covered with double-dip and even depression predictions. The Dow was recently down 8 days in a row which was the most since 2008, and a 12% drop in two weeks makes this feel like 2008 all over again.

Still, when you sit down and look at our current economy, there’s very little in common with 2008:
  • Banks are much better capitalized than 2008, with many profitable and some running record profits ($JPM, $WFC).
  • The auto industry is still reporting sales growth with $GM and $F both profitable and nowhere near bankruptcy.
  • U.S. companies as a whole have a record $1.9 trillion in cash on their balance sheets and they’re in extremely good position to weather a downturn.
  • Valuations are already depressed. At the end of 2007 S&P companies reported 82.54 EPS with the S&P over 1400 or around a 17 p/e. With the S&P at 1200 and yearly earnings estimates still at around 95, this gives the S&P a 12.6 p/e. Even reducing EPS estimates to 85 results in a p/e of 14.11. (Don’t forget record cash on hand as well) Source:
  • Interest rates are at record lows, and the markets are flush with liquidity. The fed has made it clear they will continue to accommodate if needed. Companies are issuing bonds at record low rates. Liquidity is not a problem like it was in 2008.
  • While we have seen a spike in gas prices, they are already on the retreat, and in my opinion the US economy is in much better shape to handle them with many upgrading to more fuel efficient vehicles and having adapted from the 2008 shock.
  • We were losing jobs as early as December 2007 which accelerated throughout 2008, but we're still seeing job growth as of July 2011.
  • The dollar is still extremely weak and helping companies with international exposure produce record S&P 500 profits and higher than normal margins.
  • And here’s the biggest and most important differentiation: We know the economy has problems and needs to be fixed. The market spent a good part of 2008 in denial about the problems facing the economy, but now the media and even our own government seem to spend as much time possible reminding us about how bad things are. Investors are depressed, valuations are depressed, and everyone is scared to invest. So who is actually left to sell? In a worst case scenario we’re likely to run out of sellers much sooner than we did in 2008.
With all this being said I still have no idea where the market will eventually go. With the Japanese crisis and current debt problems in the U.S. and Europe, the market could stay negative for an extended period of time. However, I think if you cut through the extreme pessimism, there are many quality companies out there selling at severely depressed prices.  

Stocks I own like Coke, Johnson and Johnson, and Kraft all reported solid earnings and are trading near or way below their normal valuations. Google and Apple both recently reported record earnings and they still trade around 10 forward p/e’s if you back out both of their massive cash piles. All of these companies also receive a large amount of revenue from international and emerging markets, and are not as reliable on a weaker US economy.

Things could be a lot better than they are right now, and there’s plenty that needs to be done to get the economy back on track. Still, I think the market is pricing in an extremely negative outcome that’s just not as likely to happen. However, I still try to prepare for any scenario and my strategy has always been to buy quality companies that I’m comfortable holding in a downturn. I will continue to be a buyer here at what I feel are overly depressed levels.

Tuesday, August 2, 2011

Current Positions

My portfolio at the close today:

AAPL 11.00%
WFC 12.50%
KO 13.00%
KFT 8.00%
JNJ 8.00%
GE 6.00%
C 6.50%
MSFT 4.00%
NKE 5.00%
GOOG 6.50%
AMZN 5.00%
SNCR 3.50%
CTXS 3.00%
BRK-B 5.50%
NFLX 2.50%