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  • Warren Buffett Sees a Sustainable and Opportunistic U.S. Economy
    The consensus on the U.S. economy is still rather skeptical even considering the 100% return the S&P 500 has posted since bottoming in early March 2009 at $666.  The majority of U.S. consumers, investors, and economists, all seem to be anticipating some significant headwind that will cause stocks to sell-off considerably.  After watching their investments tank in 2008, most investors still do not trust the stock market completely and feel uncomfortable putting a large sum of their money into it.  Needless to say, their attitude and outlook is, at best, cautiously optimistic and hesitant.  To quote perhaps the greatest investor of all time, Warren Buffet, “One should be greedy when others are fearful and fearful when others are greedy.”  Buffet has without doubt profited from this approach.  In 2008, when everyone else was panicking and dumping stocks, he was buying the best of breed names such as Goldman Sachs (NYSE:GS) and General Electric (NYSE:GE).  I believe at this point in time, fear still outweighs greed considerably.  Investors, who got burned in 2008, do not want to buy into the stock market right now because they feel they have already missed the run up.  They are fearful and uncertain as to what they should do with their money, which is primarily invested in cash and bonds.  On the other hand, many traders, institutions, and economists believe there is another shoe soon to drop, which will depress the economy further.  When asked what the shoe to drop will be, the consensus opinion usually ranges from a collapse in the commercial real estate market to rising oil and commodity prices.  These individuals are either sitting on the sidelines in cash or positioned for a decline in stock prices. 
     
    It is important to note that a number of very vital indicators have changed for the better since 2008.  First, stocks have risen sharply from their depressed levels.  This rise has been due to increased demand for goods and services both domestically and internationally, lower inventories and supply, and more efficient cost management and production methods.  Secondly, although the economy lags the stock market, it has without a doubt gotten much better.  Corporate profits are at all time highs, companies continue to raise their outlooks and guidance, growth in emerging markets continues to flourish, the trend in weekly unemployment claims is now declining, labor costs are falling, and the U.S. service sector, which comprises two-thirds of the American economy, is growing and at a 5-year high.  These are facts not opinions.  When one combines these positive indicators with the still fearful, doubting, and cautious sentiment of the average U.S consumer and investor, it seems that this great bull market in stocks could still have a long ways to go.  It is no wonder why Warren Buffett is still extremely bullish on the U.S. economy.  As he stated in his annual shareholders letter released on February 28th, “Money will always flow towards opportunity, and there is an abundance of that in America.”  Buffett’s Berkshire Hathaway company (BRK-A and BRK-B) is also a clear example of why the bull market in stocks is far from over.  The company is sitting on $38 billion in cash, with this position likely to grow as Goldman Sachs and GE buy back their preferred shares from the company.  Buffett has openly declared that he is anxiously seeking to put a large sum of this cash to work in the stock market soon, specifically through a megadeal.  As he states in his annual shareholders letter, “We are prepared.  Our elephant gun has been reloaded, and my trigger finger is itchy.”  Berkshire Hathaway cannot be the only company looking for deals in this market.  I assume there are many other savvy institutional investors with itchy trigger fingers that could pounce on stocks given even the slightest pullback.  Also, Berkshire Hathaway is without question not the only company with a massive amount of cash on its books.  If this cash soon begins to flow off the sidelines and into the market, it should act like gasoline on a burning fire.  Investors should be prepared to buy the stocks of the best of breed companies on any pullback.  They should also understand that bond prices could soon begin to fall for two reasons: 1.) potential inflation and rising interest rates, and 2.) investors selling their bond positions and reallocating their money into stocks.
     
    The stock sectors that should outperform going forward: banks, construction, shipping, data protection technology, alternative energy, commodities, utilities, and pharmaceuticals.
     
    Bullish:  BRK-A, BRK-B, AB, OXPS, DB, CS, BCS, C, BAC, HRB, MTZ, KBH, ITB, IRM, VDSI, ASIA, INTC, TTEK, TOT, SD, NG, FE, NRG, PPL, FRO, NAT, ABT, GSK, PFE
    Mar 09 8:56 PM | Link | Comment!
  • Is a Pullback in Stocks Near?
    Two questions that have been floating around the market recently are: 1.) When is the pullback in stocks going to occur?  And, 2.) How big of a pullback should be expected?  Market pundits and experts have been predicting a pullback of anywhere between 5% to 10% in stocks over the past few weeks.  However, this has yet to occur, as stocks continue to push higher.  We are getting to the point where hedge funds and institutions are actually afraid to sell-short stocks because of the recent bullish momentum.  It is usually at this point-in-time, when we get a slight correction because everyone who wants to be invested already is and with a lack of short-sellers in the market, there is nobody to take the other side of the trade (hence, profit taking outweighs buying and stock prices decline).  In a strong and momentum driven market like the one we are in today, we should not expect anything more then a slight correction because there are still a large number of under-invested market participants waiting on the sidelines anxiously ready to buy.  

    As we examine a long-term chart of the S&P 500 SPDR (SPY), we can see the index has been range bound for the past 10 years.  The SPY's recent upward move starting in early '09 has been on very strong volume and momentum.  The index looks to be headed to the $155 level over the next two years.  On this presumption, pullbacks on the SPY should be bought until $155 is reached.  Over the short-term, a slight pullback of 5% to 10% should be expected, and it should be bought aggressively.  Right now the SPY is trading at the $132 level.  The expected 5% to 10% correction over the next few weeks should bring us back to the $120 to $125 level.  This pullback should present an excellent buying opportunity.  At $120 to $125, the SPY will have upside potential of 24% to 29%.  Fundamentally, the SPY is trading at approximately 13.8x forward earnings.  At our $155 two year projected price target, SPY would be trading for 16x forward earnings today.

    The S&P 500 SPDR (NYSEARCA:SPY):

    The long-term bullish momentum in the SPY has been confirmed by the long-term negative price action in the Volatility Index (VIX).  As you can see below, the VIX, which measures fear and volatility in the market place, has been trending lower since topping out in late '08.  Over the short-term, with rising commodity prices and economic uncertainty in Egypt, I would not be surprised to see a slight pop in-line with a 5% to 10% correction in the SPY.  However, over the next two years, the VIX will most likely trade lower to the $10 level, where it should find long-term support.

    Volatility Index (VIX):
    Feb 10 2:31 PM | Link | Comment!
  • European Banks Look Ready to Continue '09 Bull Run (DB, CS, and BCS)
    After consolidating for over a year, or all of 2010, European bank shares look ready to continue their 2009 upward momentum.  The foreign banks that look most attractive are the large ones, such as Deutsche Bank (NYSE:DB), Credit Suisse (NYSE:CS), and Barclays (NYSE:BCS).  Deutsche Bank and Barclays are currently trading below their book value at 0.70.  Credit Suisse is trading slightly higher at 1.5 times book value.  Although, CS is trading at a slight premium, it is partly due to CS's low price-to-earnings growth ratio (NYSE:PEG) of 1 and its 3.91% dividend yield.

    The below table is a fundamental ratio analysis, which contains forward price targets for DB, BCS, and CS.



    After looking at the fundamentals, we next need to look at the technicals or charts.  Below are the long-term technical charts for DB, BCS, and CS.  As you will see, since shooting up in 2009 on very high volume, the charts show the European bank stocks consolidating (trading slightly downward) all of 2010.  This consolidation is technically known as a bullish wedge formation.  A breakout above the bullish wedge's upper resistance line usually follows and confirms the bull trend.  In addition to the stock's price consolidation, the relative strength index (RSI) for DB, CS, and BCS has been consolidating right around the 50 line in what is technically known as a volatility wedge or squeeze.  This proves bullish because it confirms the stocks' price action.  Finally, as we look at the on-balance volume (OBV) indicator for DB, CS, and BCS, we can see a clear bullish divergence.  As the stock prices for DB, CS, and BCS pullback in consolidation, the OBV indicator stays well above its 2009 trough and its support line.  In comparison to the fundamental price targets for DB, CS, and BCS, listed above, the technical price targets seem to be in-line.

    Deutsche Bank (DB):


    Credit Suisse (CS):




    Barclays (BCS):




    investorsnewsletter.blogspot.com/
    Tags: XLF, FAS, DB, CS, BCS, Banks, Financials
    Feb 02 9:33 PM | Link | Comment!
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  • Projected 2 year price target for the SPY is $155.
    Feb 10, 2011
  • SPY will trade down to the $120 to $125 level over the next few weeks. I believe you should buy this pullback aggressively.
    Feb 10, 2011
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