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Alex Filonov
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I was born in 1956 in USSR. After graduation from college in 1979 I worked full-time as an IT specialist. Until 1990 I worked for different companies in the Soviet military industrial complex. I created a small software business in 1991, which failed in 1993. I worked for Oracle Corp in 1995 in... More
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Muddling Investor
  • Great Year! What Next? 3 comments
    Dec 31, 2013 10:26 PM

    As usual, I'm trying to see market future based on three metrics.

    Fundamentals

    Usually the most important metric. And it's not clear now. On the positive side, economy is growing. Not only in US, in the whole developed world. On the negative, we have two metrics on the top of the range: S&P P/E ratio, currently 20.32, is much higher than average (about 15) and quite high for non-recession times. Profits as percent of GDP, currently above 12.5% before tax, are at all-time high. It doesn't mean that market is at the top. But to make market growth sustainable, GDP should grow faster. Fortunately, it does grow at around 3.5% last 2 quarters. In short, fundamentals are neutral to slightly positive.

    Technicals

    They are gr-r-r-r-r-r-reat!. Except for the fact that almost every stock index is overbought. But, as we know, overbought condition can be worked out as a function of price or as a function of time. And trend is your friend (unless it's the end).

    Sentiment

    Scary. I mean, the sentiment is very, I would say, extremely, bullish. I don't remember such sentiment since the end of 1998. Of course, we had one more year of huge growth left then. But it all ended bad. The only bright spot: most people are still reluctant to invest in stocks, it's still a market for professionals. So there is a room for expansion yet. But if average Joe doesn't come to the stock market soon, things might get really ugly. Because bullish sentiment usually means that there are no buyers left.

    Conclusion

    I write to explain to myself what I think about market. Started this article with a bearish feeling, which was helped by the fact that the last quarter of 2013 was obviously huge window dressing by (grossly) underperforming funds. But, with technicals very bullish, fundamentals neutral to slightly bullish and bearish sentiment I have to come to conclusion that things aren't that bad and we might still have bull market in 2014. Of course, a lot of things can happen and even without major events market can behave quite unexpectedly. But I think the best idea would be to be brave, take some risks and make money on the long side.

    Themes: Market Outlook
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Comments (3)
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  • Very nice summary, Alex. There are pockets of value in this market. I'm looking at Brazil's banks ($BBD, $ITUB) and even $PBR. Maybe will by some Gazprom if it drops into 7ish.
    Happy New Year!
    1 Jan, 12:53 AM Reply Like
  • Author’s reply » Well, it's your money, your risk. I wouldn't go to Brazil, or any emerging market. And I would never buy Gazprom, because it's not a private company, in reality it's a part of Russian government.
    1 Jan, 02:00 AM Reply Like
  • Thanks Alex.
    In my opinion the economies here and in Europe are on the mend. I wouldn't be hot to buy Greece or turkey at this point as they are more of an emerging market than part of the ECU but stocks like FEZ, EWU and DFE have done well and I think they will continue to do so.
    If the US economy is on the mend then consumers should start to have more discretionary income and the could entice Joe Average to start putting money in the market even if its by using their 401Ks at work or IRAs.
    1 Jan, 02:38 PM Reply Like
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