Daily Investment Interpretations

March 2, 2011

2011-3-2 (Wednesday): The markets yo-yoed up and down all day, closing up a few points from where they started.. The NASDAQ Composite climbed 10.66 points (0.39%) to 2,748.07. The Dow gained 8.78 points (0.07%) to 12,066.80, while the S&P 500 rose 2.11 points (0.16%) to close at: 1,308.44. Oil jumped to $102.43 a barrel, while Gold registered another new high at $1,436. The VIX slipped 0.31 points to 20.70
The reason for today's market doldrums isn't hard to find: oil closing at $102.43 a barrel. It's not that there's an imminent shortage of oil, or that there will necessarily soon be one. Oil futures are responding to elevated, perceived risk levels. (Today, Qaddafi's forces dropped bombs near Libyan oil facilities.) The U. S. and the U. K. have threatened enforcing a no-fly zone over Libya, keeping Qaddifi's forces from bombing Libyan insurgents. The problem is that the first step in such a program is attacking and destroying Libyan air defenses... an act of war. And as the U. S. has learned to its sorrow, it's a lot easier to start brushfire wars than it is to shut them down.
    Here's an interesting article in The Guardian: Intervention in Libya would poison the Arab revolution. Here's an excerpt from another article: Libya, Could Military Intervention Backfire?
    "Hamid said he worries that the U.S. might be so haunted by the mistakes it made in Iraq that it would fail to take action in what is a truly humanitarian crisis in Libya. 'Unfortunately, we have a president in the U.S.,' he said, 'and I think this goes for many Western leaders, who are defined by their caution. They are afraid of making the wrong moves, so they dont make any moves at all. And when they do, its quite late in the game.;
    "That is not to say that imposing a no-fly zone in Libya would be risk-free for the U.S. and NATO allies. 'It could cause problems,' Hamid said. 'It could provoke a response that were not expecting. But we have to choose between policy alternatives, none of which are ideal, and you try to weigh the costs.'
    "Some officials say the entire debate may be mute. NATO has said that any intervention would have to be sanctioned by the U.N. China and Russia, both of whom hold permanent seats on the Security Council and enjoy veto power, indicated this week that they would prefer to see the matter resolved diplomatically."

    We seem to be repeating the 2008 run-up in oil prices to $147 a barrel brought on by speculation in oil futures.

    This is a news-driven stock market and as such, is unusually unpredictable. So what should we do now? I can only tell you what I'm doing now. Two of my rules are: (1) "Sell early or not at all." (taken from TopStock Portfolios: Panic Early Or Not At All), and (2) don't buy in a falling market. Wait for the market to bottom, and then to move one-third to one-half of the way back up. In keeping with the first rule, I sold a couple of stocks today at a profit. I don't know whether the stock market is going to go down or up from here, but at the moment, I want to be in lower-risk, lower-leverage investments until the vagaries of this Middle-Eastern situation no longer wag the market.
    In the meantime, the long-term outlook still seems to me to be unchanged. If the earnings on the S&P 500 hit $107 a share by the end of 2012... and I'm reading that they're more apt to come in higher than lower... its P/E ratio, if it closed around 1310 as it did tonight, would be about 12.2. That's not a terribly low reading, but it's well below the 20:1-to-22:1 ratios that commonly  characterize bull market peaks. Of course, we don't have to have an apogee in December, 2012, but it seems to me that it would take a glum outlook at that time to inspire a P/E ratio of 12.2-to-1.. 
    David Moenning with TopStock Portfolios has penned this article tonight, Is That All There Is?, suggesting that we may be at or near the top of this cyclical bull market  He mentions that we've risen 98.5% from the March, 2009, low to the present time. But the market indices had dropped about 55% from their October, 2007, high to their March, 2009, low. Further, there will be an additional five years of rapid earnings growth between October, 2007, and December, 2012. Barring the unexpected, I would expect to see the S&P 500 close quite a bit higher than its October 8th, 2008, close at 1,562. (As I recall, the stock market wasn't overpriced in October, 2007. I believe it was the sub-prime meltdown that brought down the market.) I'm extrapolating to 2,100 to 2,300 on December 31, 2012 (20-to-22 times $107).
    Of course, anything can happen. There could be a double-dip recession. Another Wall Street bubble could burst. Geopolitical upheaval could torpedo the global recovery. There are no certainties, and nimble flexibility is, I think, a prudent modus operandi.
    Also, although a much higher market might be the endpoint, there can be much lower market indices between here and there. The stock market correction that began in June 1983, and lasted until  September, 1984, saw a drop of something like 20% on the Dow at its nadir.
    To sum up, I think it makes sense to be in a sell-or-hold mode tonight, until the stock market declares its intentions.
    The Daily Decision Stock Trade took a couple of hits during the current market reversal. One of its stocks was down nearly 10% and another was down nearly 5%. A third stock (Yahoo) generated a 3 % loss. On the other hand, the strategy made enough on three other trades to nearly offset its losses. And with luck, its current open position may do the rest of the job. And let's face it, the last seven trading days have been brutal. 
    I continue to be very impressed with Mr. Meiers' acumen.
    Market futures are up about ⅓ % tonight.