Friday, August 21, 2009

On ECRI and the Stock and Other Markets

Dr. Achuthan of ECRI had an excellent video interview yesterday, found by clicking on the hyperlink below.

What's especially interesting is that he disclosed what is usually proprietary information, which is that ECRI's "Long Leading Indicators" are continuing to rise. He is increasingly confident in a significant recovery from the economic downturn. ECRI's weekly indicators continued their rise on today's release. No matter that the brilliant Ed Harrison's "Fake Recovery" thesis is intact; as he pointed out months ago, recessions and depressions always end even in oligarchies, even if only definitionally, and enjoy the good times. I believe that the U. S. as Japan thesis remains intact, with giant zombie financial institutions continuing to loot the rest of us. But where are they stashing their loot???

Back to Dr. Achuthan.

Happily, he ignored the stock market and focused on the economy.

He also highlighted industrial companies as recovering faster/stronger compared to ones tied to "the consumer". Nonetheless, he expects consumers to strengthen and participate in an economic recovery.

Increasingly this is looking like the opposite of what followed the 1974 bottom. There was a temporary respite from very high inflation, and oil prices stopped rising. The cyclical "V" down in the economy became a cyclical "V" upwards. Soon enough, the stock market topped in nominal terms. While it made its nominal low in 1974, it made a much lower low in 1982 when adjusted for inflation. And, inflation and interest rates had an amazing amount of upward move in time and place to go.

Of the few stocks highlighted here some time ago, two have surged to all-time highs: Ross Stores (ROST) and National Presto (NPK). ROST is now trading at almost 20X trailing earnings and is felt at Econblog Review to have moved "too far, too fast". It is reminiscent of Toll Brothers reaching a trailing P/E of nearly 20 as it peaked in 2005. ROST is at 14-15X earnings projected for the year ending Jan. 2011. (!)

Just as McMansions were about to go out of style after TOLL topped, so may Ross's low end niche, which has benefitted from people trading down from Wal-Mart and may see its ability to obtain bargains on inventory get cut, as retailers across the board have become stingy in ordering clothing in order to keep profit margins up. ROST stock underperforms when prosperity returns.

Another stock that bottomed in October, and made a higher low in November when the market hit a fresh bear market low, then made a yet higher low in March as the market hit what for now is its low, is FPL Group, the old Florida Power & Light. It yields about 3.3%, has a P/E of 12.5 or so on 2010 earnings, and has a large, profitable alternative energy subsidiary that makes it a sort of play on higher energy prices. Its base of Florida remains a growth state with far better state finances than California. The housing depression raging in Florida will in fact stimulate in-migration.

Teva (TEVA) has a similar though steadier chart and an even lower P/E than FPL.

No matter what has happened with the stock rebound, the Dow is where it was Oct. 7, 2008 and is down almost 4000 points from 2 years ago (about when yours truly exited the stock market more or less in toto). On a 2-year basis, the best performers I can find among stocks I follow other than ROST are, surprisingly, the laggards of late, namely the only 2 Dow stocks to be up for 2008, namely Wal-Mart and McDonald's, which have almost identical total returns over the last 24 months.

What beats those two stocks: gold, easily. Given that AIG truly did collapse having written insurance (CDS) contracts with no reserves, and given that there truly was a Ponzi scheme with mortgage fraud at its root, and given that the Federal deficit is equal to 2008 U. S. corporate profits, and given that 20% of personal income in the U. S. is now transfer payments (read "welfare"), then monetization is truly going on. Gold has mild seasonal weakness now. One of these days it could explode to the upside. Now that the economy is being goosed successfully (for now) globally, silver finally looks interesting as a more volatile companion to gold; but long-term, only gold is the real deal.

I will discuss the long Treasury in a separate post.

The above stocks or commodities are for the nonce personally owned by this blogger and family members. This may change without notice. I do NOT believe that the stock market is anywhere bargain levels.

Copyright (C) Long Lake LLC 2009

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