Birchtree's Account Talk

[Birchtree]

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I don't want to sully someone elses account talk so I'll offer my latest comments here where I am accountable.

Jack Benny was often accustomed to saying Howard Dean was so good at opening his wide mouth, that he would put Monica to shame. Can't somebody catch him on tape tush pushing with Barney Frank, or to be politically correct, Obama.

I just had to vent a little today. The current stretch of 14 consecutive quarters of double digit S&P 500 profit growth is a new record - 15 quarters is on the horizon.

 

[Birchtree]

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I've been searching for a bearish scenario and finally found a good one at Comstock Partners - "In terms of valuation the S&P 500 is selling at 19 times earnings now compared to 15 times in 1994. From that point the market soared to 37 times trend-line earnings by earlt 2000. That price-earnings ratio capped the stock market bubble, and was 76% higher than the top of any market P/E for over one hundred years. In 1994 we were in the midst of a secular bull market, while now we are in a secular bear market with this year's high still a substantial 20% lower than the level reached five and a half years ago. (1527 versus 1262). Since the Fed began operations in 1913 the vast majority of tightening periods have led to recessions and bear markets. The bear market did not generally end until the Fed eased two or more times - and for good reason. When the Fed stopped tightening the market usually reacted negatively to increasingly disappointing news on the economy and corporate earnings. The experience to the contrary in 1994-1995 was the exception rather than the rule. We continue to believe that the monetary, economic and sentiment indicators point to great risk in the market at this juncture".

Contrary to most opinions from technical people I firmly believe we are in a back to back secular bull market, having experienced a cyclical bear market from 2000 to the spring of 2003. There has nevcer been a back to back secular bull market in history - perhaps this will be the exception this time around.

This week there have been several occasions when the market has been much stronger at the opening than at the close - this is a head fake situation designed to sap bullish enthusiasm. It's not working in my case.

 

[Birchtree]

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Watching and waiting - for what? The breakout of course. The big surf upward.

The NYSE breadth MCSUM continues to move higher and is above +250, resistance comes into play at +450. The NYSE volume MCSUM is leading its breadth cousin to the upside - this alone would suggest that a key price top is not being traced out at the current time.

The NYSE breadth MCO moved higher Friday, while bottoms above bottoms comtinue to control the short term pattern.

For an investor in the 35% Federal tax bracket, a two year Treasury note yielding 4.4% provides an after-tax uield of 2.86%. Because dividends are taxed at a rate of 15%, a stock would have to yield 3.36% to match the Treasury note's after-tax yield. There are 63 stocks in the S&P 500 that have a yield of more than 3.36%; 86 stocks yield at least 3%. That's a sizable list for investors who are shopping for income opportunities.

The lagging NYSE cumulative advance-decline , or breadth index, which has not confirmed the recent new bull market high reached by the S&P 500 index is slowly advancing as of Friday. The recently lagging DJ Utilities index is still below its early October peak, but is also improving as of Friday. The race is on.

 

[Birchtree]

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As a contrarian all my TSP money is on the undevalued C fund. All I want from Santa is a C Fund price of $13.85 and I'm a happy camper for 2005. Next year I would anticipate a $2.00 gain versus a $1.25 this year.

Does anybody remember what Goldilocks looks like? A fourth quarter GDP growth seems likely to be close to an annual rate of 3% after an upward revision to 4.3% in the third quarter, the net gain in employment rebounded moderately in November, and recent core unflation readings remain benign, despite the Fed's concern that higher oil prices will influence underlying inflation trends. I'm remaining BULLISH.

Imports in the U.S. are now more than 60% larger than exports, and the way you redress that gap ultimately is by increasing competitiveness by cutting your price in the foreign market via currency depreciation. So all 2005 likely represented was a temporary counter-tren rally in the dollar, not the start of a new multi-year bull market. A turndown in the dollar can be expected to have its benefits as far as the stock market is concerned - almost 40% of S&P 500 revenues are derived from overseas operations. From a big picture standpoint, a weaker dollar is good for large-cap export-oriented growth companies.

 

[Birchtree]

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I was watching Bloomberg this am when a technician named Jeffery Weis appeared with some graphs and commentary. His primary focus was on the current bull market which started in 10/02 and the resistance the S&P 500 was up against. He stated that if this resistance was penetrated and then became a floor the Dow Jones Industrials would then rally to a new all time high over 11,722. He then said he believed we were in a new bull market - not a cyclical bull market. This has been my lonely stance for three years and now I'm no longer alone. It doesn't mean we are correct but I feel better. A back to back secular bull market may in fact be real.

 

[Birchtree]

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The Fed couldn't find inflation in higher energy prices - don't fear, they are now looking for inflation to perk up in resource utilization, an old Phillip's Curve model dealing with labor markets and the manufactoring sector. What a waste of time.

Spent the day hitting targets in the commodity areas. Looking for my green light.

 

[Birchtree]

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To repeat: from a big picture standpoint, a weaker dollar is good for large-cap export oriented growth companies.

The R2K cumulative AD line has been behaving simiular to the NASDAQ AD line for the past year, glaring evidence of shrinking participation in the small cap arena.

One sign of an older bull market is evidence of money flowing out of the smaller caps and into large caps. There is evidence of healthy and broad-based liquidity infusions into broad based larger cap stocks, suggesting following any consolidation phase, we will likely see higher prices ahead for the large caps.

 

[Birchtree]

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From TWSJ

Record sums of American money flowing into foreign stocks are starting to help reshape overseas companies, encouraging more disclosure and other investor friendly policies. The Treasury Department today is expected to release figures showing that American net purchases of stocks outside of the U.S. in the first 10 months of 2005 are on a pace to smash their 2003 record of $88.6 billion. Net purchases through September, which totaled $86 billion, were within a whisker of that record. At an average of more than $9.5 billion a month, the 2005 total could hit $115 billion.

American investors' appetite for overseas stovk appears to be a long-term trend, not a passing fad driven by superior foreign stock-market returns in recent years. While the better returns have contributed to the surge, analysts say the trend has been building for years as the U.S. economy has matured and the growth prospects of emerging markets have ripened. Financial consultants now routinely advise clients to have more than 20% of their stockholdings in foreign shares, up from about 15% five years ago.

Next year, of course could bring a leveling off or even a pullback in the appetite for foreign shares. A continuation of the dollar's rally on foreign-exchange markets also could damp Americans' enthusiasm for international investing. A strong dollar means foreign returns are reduced when converted back into the greenback. That has crimped returns a bit this year, though not enough to scare off the big money or to prevent most foreign markets from trouncing the U.S. From 2002 to 2004, the weaker dollar was sometimes the only thing that made overseas stocks a better investment than U.S. stocks.

 

[Birchtree]

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But long term, the case for increased foreign holdings by Americans is compelling. While non-U.S. stocks account for about half of the world's stock-market value, foreign shares represent only 16% of the stock portfolios of American institutional investors, leaving plenty of room for them to increase their overseas positions.

Structural shifts in corporate and investor behavior won't happen overnight. For all the structural changes thsat make foreign stocks more attractive, this year's surge of U.S. money overseas has been driven in part by performance. A broad measure of stocks in Europe, Australia and the more-developed parts of Asia is on track to outperform the S&P 500 stock index for the fourth straight year, something that hasn't happened since the mid-1980s. That measure, the Morgan Stanley Capital International EAFE Index is up 10.2% in dollar terms so far this year, compared with the Dow Jones Industrial Average's 0.9% rise and the more comprehensive S&P 500's 5% increase.

For U.S. investors, greater exposure to foreign markets could heighten volatility in the near-term. But in the longer run, a portfolio that combines U.S. and international stocks tends to produce the best returns with lower risk, many analysts say.

 

[Birchtree]

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The S&P 500, for instance, enjoyed an annualized return of 11/12% since December 1969, compared with 10.42% for the EAFE index. A combination of the two would have achieved superior results. A portfolio with 30% of its assets in the EAFE Index and 70% in the S&P 500, rebalanced annually to maintain those levels, would have returned 11.18%, but with less volatility than a portfolio that was entirely U.S. or foreign.

Overall, foreigners spend much more investing in the U.S. than Americans do overseas, but it is mostly in corporate and government bonds. In the first nine months of 2005, foreigners bought almost $700 billion in U.S. bonds and $64 billion in stocks. Americans only bought about $18 billion in foreign bonds. Looks to me like money will flow both ways in the future.

 

[Birchtree]

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"The present bull market in commodities is like the 1982-83 bull market in stocks. It has carried the index to new all-time high ground and paved the way for a great grand-cycle bull move that will go down in financial history." The One Handed Economist. I made over $300,000 in ten months in the 1982-83 run. The only problem back then was that capital gains taxes were at 50% for short term.

 

[Birchtree]

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from TWSJ:

Money managers peer into every nook and cranny of the global capital markets in their search for superior returns. But somtimes they overlook juicy prospects that are staring them in the face. Large-cap U.S. stocks, which not long ago held pride of place in every investment portfolio, represent just such an opportunity.

During the bull market of the late 1990s, many of America's largest enterprises soared to stratospheric valuations. The bear market deflated overblown expectations. Investors now view many of these companies with profound pessimism.

The bear argument goes something like this: The megacaps' home market is saturated, while foreign sales are threatened by the strengthening dollar. Their earnings haven't picked up much with cyclical recovery. Since these businesses are generally well-run, there are few restructuring stories to sell investors on. They are also too large to attract the interest of private-equity firms. To cap it all, accounting reforms have limited the ability of the large businesses to smooth their earnings growth.

This gloomy story is reflected in the share prices of leading U.S. firms. Their stocks have historically traded at a sizable premium to the market. Yet today, the top 25 U.S. companies by market capitalization trade at a price-earnings ratio of 16.7 times and a dividend yield of 2.3%. By contrast, the other stocks in the S&P 500 stock index sell for 19.6 times reanings and yield about 1.5%.

Not since the grizzly aftermath of the 1970s "N ifty Fifty" boom have large-cap stocks been so cheap relative to the market. Once again, investors appear to be punishing America's biggest companies for their recent disappointing performance.

Yet these stocks are attractive for reasons other than valuation. They tend to be more stable than smaller companies during economic downturns. With the domestic housing market wobbling and emerging markets vulnerable to a China slowdown, the defensive qualities of U.S. large-caps may soon return to favor.

 

[Birchtree]

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from TWSJ:

Value stocks outperform growth stocks. Investors who ignored this message in the late 1990s got badly burnt. Since 2000, investing in U.S. value stocks-buying companies that are cheap in relation to their book value and earnings-has produced annual returns of 5.4%, according to Ibbotson Associates. Growth investors have lost nearly 5% a year over the same period. After this strong performance, savvy investors are asking whether value is, well, overvalued.

By definition, value stocks trade at a discount to companies with better growth prospects. In the past, the discount has turned out to be excessive. That explains why value investors have done so well. Today, however, the book-value discount to growth is 41%, compared with its historic average of 63%. according to Trilogy Advisors, an investment firm. Since the turn of the century, value stocks have had the wind in their sails. They started out cheap relative to massively overpriced technology and large-cap stocks. The Federal Reserve's easy-money policy also helped.

Financial companies, which comprise a third of the stocks in Morgan Stanlet's MSCI U.S. value index, have benefited from low interest rates and strong growth in mortage lending. As real interest rates have declined, yield-hungary investors have boosted traditional value sectors paying large dividends-such as utilities.

The private-equity boom has also been a boon. Companies with poor growth prospects and stable cash flows have been gobbled up by leveraged-buyout firms. Businesses whose performances are tied to the economic cycle-another traditional value category- also benefited as the economy emerged from the 2001 recession.

Today, the prospects for value are less bright. Interest rates continue to rise, makingthe dividend plays less attractive. Financial companies, which can no longer earn easy profits frm the interest-rate carry trade, are exposed to the weakening housing market. Private-equity demand remains strong, but the easy pickings in the value sector are long gone.

Since 1980, whenever the value discount has narrowed to its current level, growth stocks have outperformed value shares by an average of more than 5% a year over the following five years. The stock market today is caught in a value trap.

Dennis

 

[robo]

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" The Fog Begins to Lift "

http://www.fi.com/us/smo?wherefrom=&alleycode=JM&doc=outlook-us.pdf

ENJOY BIG BULL!!!

 

[Birchtree]

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Now, if anyone wants to be BEARISH, please by all means be my guest - the more BEARS the better. But the rest of the year most likely will see new yearly highs being placed as well as some new all time highs. Tomorrow we will probably place a new yearly high in the DJIA above 10,940, that will confirm the DTA which placed another new all time high today. The NYSE composite is already at another new all time high, the DJU are playing catch up - and the Wildhire 5000 goes to another new all time high tomorrow. The NASDAQ is at a yearly high now. Anything above 1269 I believe on the S&P500 puts it above 5 year highs. The R2K is just shy of another new all time high. Yes, we will have a correction sometime after January06 but probably will not be deep enough to provide any optimistic pricing. Going to ride this one for as long as I can stay in the saddle.

 

[cowboy]

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I just have to ask this Birchy. You seem to know some about markets and have made some good calls. Why then do you stick with the dull C fund? I always cost averaged into the funds prior to the internet. I know most consider me very high risk allocator. Since then though I have watched and played the high risk for very good gains maybe moving way more than I should. To me playing C has not been worth the risk. Why u ask? The G fund year to date yeild is 4.31%, C fund year to date yield 6.12% a risk gain to me of only 1.81% which issmallin my opinion compared to S & I. Not thatsticking with the C fund is a bad thing. I am curious that if you think the C is going to drop why not move at that time and hope to gain while the fund goes down instead of freezing in the saddle, you could still allocate into the fund as it went lower and save your pennies and cost average in lower. Is it because you don't want to risk being wrong? I may not be on for a few days so don't worry if I don't respond to your answer. Thanks for the imput and Merry Christmas.

 

[nnuut]

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AMEN! Sorry Birchtree, butI agree with the COWBOY!:^But you're doing lots better than I??

:shock::shock::shock::shock::shock::shock::shock::shock::shock::shock::shock::shock::shock::shock::*:*

 

[Birchtree]

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Cowboy,

Truth be known - over the years I've had my taste of failure - but when I'm right I make money. I use my TSP account to dollar cost average into the C fund on an every two week basis - that way I catch most of the sideways action and continue to build my position. I'm concentrated at 100%. I have several other accounts where I'm also concentrated - only in an international fund and small cap fund. These actually belong to my wife's retirement plan. My C fund has currently returned me a $1.14 since posting on TSP. There is actually more money gained when you take into consideration the effects of dollar cost averaging and the accumulation of shares. I'm presently pushing up against a gain of $40K and really have no reason to pull the pistols out at the moment - dollar cost averaging is the way to go. There will however come a time when I'll have to move but that is a long way into the future- I spend a great deal of time searching for the next top - no one waves a flag.

Dennis-perma bull #2

 

[Birchtree]

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Standard & Poor's estimates that firms in the S&P 500-stock Index will have paid out a record $500 billion in the form of share buybacks and dividends by the end of the year. But according to Federal Reserve data, hedge funds and households were pulling money out of the stock market at an annual rate of $556 billion in the third quarter. That looks like money waiting in cash to pile back into stock in January.

In economic news, the number the Commerce Department uses to measure changes in the real value of personal spending - one of the Federal Reserve's favorite measures of inflation - fell 0.4% in November. It was the largest drop on record. The prices of long-term Treasurys rallied on the news as investors demanded less compensation for future inflation.

The 20-stock Dow Transportation Average again closed at an all-time high. Year to date, it is up 11.9%. The Nikkei Stock Average of 225 companies has risen 39% this year. More later....

 

[Birchtree]

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If you want evidence of how appealing Japan is as an investment, look no further than next year's anticipated boom in initial public offerings - a signal Japanese companies believe the strong economy will continue to boost their prospects. Underwriters and analysts say they expect the number of Japanese IPOs to rise from the 171 recorded so far this year.

An increase in the number of publicly traded companies would make the market more attractive to Japan's retail investors, who are often active in IPOs and are beginning to dable more aggressively in stock investing. Japan's households have assets of about $14 trillion - more than the annual gross domestic product of the U.S. - and some of that could be directed to stocks. Guess who has all the money?