A few weeks back we introduced you to Bill Nygren, manager of the Oakmark Select fund. In the video Nygren plainly states his belief the market is presenting investors with a lot of opportunity to purchase undervalued but high quality companies. In his 2009 semi-annual letter to his fund holders, he reiterates this view. He says,

We continue to believe that today’s long-term investors will increase their capital more by investing in stocks than by investing in other assets. Further, we believe that the long-term return for stocks purchased today is likely to be higher than historical average returns. Here are a few of our main reasons for such optimism.

Two weeks ago I posted a video on YouTube declaring that I thought we were in the midst of a new bull market. I went on to say, in order to tell if we have entered a new bull market, it is best to try and determine if we have seen a market bottom. November 20, 2008 was the day the S&P 500 reached 752. As of January 6, 2009 when the S&P 500 reached 934.7, it represented a 24% advance from the November 20th low. Technically, once an advance of 20% or more is underway that is a new bull market. But in an effort to be thorough, I went through five criteria I look at to determine if we were in fact in a new bull market.

Truthfully, I stole the criteria from Benjamin Graham’s The Intelligent Investor. In the book, Chapter 8, “The Investor and Market Fluctuations”, Graham explains how to recognize market tops. He gives five criteria. I simply turned those criteria on their head and replaced one with another I think is more relevant (at least to me). The criteria were:

Source: Flickr by danperry.com

When the holiday shopping season is done for 2008, the results for retailers will show disappointing numbers. Consumers continue to pinch their pennies in this tough economic environment. The International Council of Shopping Centers expects November and December sales at stores open at least a year to fall as much as 1 percent, the largest drop since at least 1969, when the trade group began tracking such data [video].

Many of us may find it hard to be thankful for much in this economy, especially when it comes to our portfolios. From its October 9, 2007 peak of 1565.1, the S&P 500 has been down as much as 52% hitting 752.44 on November 20, 2008. But every cloud has a silver lining. There are things to be thankful for in this, and most bear markets. I thought I'd list a few.

1. The Teachings of Benjamin Graham:

Talk in the marketplace about Detroit and Washington has been percolating about giving General Motors (GM) and the auto industry in general a bailout a la the TARP for the banking industry. GM is on the verge of running out of money. Cash received from auto sales, down dramatically from last year, will not cover the cost of running its business. GM has a monthly cash burn rate of $2 billion or more per month and only $16 billion in cash left on its latest quarterly balance some of which needs to be held in reserve.

GM blames the current economic environment on its woes. Year-over-year sales at month end October saw a 45% decrease, worse than almost all of its competitors. Toyota (TM) for instance, which will soon overtake GM’s market share in the space, saw sales decline a significant but less severe 23% over the same period. But GM’s execs are not being genuine. GM has never been a great business.

Warren Buffett has had his share of detractors since his New York Times Op-Ed piece in which he announced he would be buying American stocks in his personal account. According to Buffett, “…fears regarding the long-term prosperity of the nation’s many sound companies make no sense… But most major companies will be setting new profit records 5, 10 and 20 years from now.”  

Benjamin Graham’s proverbial Mr. Market is manic depressive and thusly causes much of the daily up, then down, then up again movements in stock prices. When pessimism pervades, Mr. Market will be so eager to sell his shares he will eagerly drive down stock prices to levels that make little sense. We saw Mr. Market do that over the last couple of weeks, driving the S&P 500 down 28% in just 14 days.

Mr. Market was so depressed in fact and so willing to sell, the CBOE VIX Index reached record proportions, topping 50 for the first time since it started measuring all 500 stock of the S&P Index. However, in his haste, Mr. Market has thrown the baby out with the bath water. Values abound as an article in the Wall Street Journal by Jason Zwieg points out:

It’s a little amusing to me how much attention Jim Cramer’s comments about pulling your “5-Year-Money” out of the market and sitting it in a safe place like cash or bonds garnered over the past few days. I for one, having given similar advice, didn’t find it that controversial. An investor, especially an individual investor, should never put their near term money at risk in the stock market.

Target (TGT) reported earnings Tuesday and beat estimates by 5 cents per share (see conference call transcript). The second quarter (fiscal year 2009) earnings report show the company had made 82 cents per share which amounts to $634 million in profit for the quarter. This might have been better news had estimates not been lowered ahead of Target’s announcement. Given the turmoil in the economy, it is no wonder the company posted its fourth straight quarterly profit decline.

As we all know, over the weekend, talks between Yahoo (YHOO) and Microsoft (MSFT) deteriorated. Microsoft has apparently taken its offer of $33 per share off the table. The market reacted Monday by sending shares of Yahoo shares down by 14%. The stock was down much more earlier in the day. Seems there is still some hope that a deal will still get done.

Word is the deal collapsed because Yahoo is asking for $37 per share, and Jerry Yang and David Filo are personally saying they want at least $38 per share for the company. Most agree that the $33 Microsoft was offering is a substantial premium to Yahoo's real intrinsic value.