Flash: Market Undervaluation Equals Low of March 2009 5-20-10

The S&P 500 now 51% undervalued relative to Treasuries 

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  • S&P 500 is down 10.9% from April high, down 2.8% year to date – so far it’s a correction that falls within the bands of “normal”.
  • The S&P 500 has been this or more undervalued only twice since 1970 – it was 59% undervalued in December 2008 and 50.1% undervalued at March 31, 2009.
  • The S&P 500 was up 23% 12 months after Dec. 2008 and up 47% 12 months after March 2009. 

 The market is cheap and oversold.  Today may be the point of the “THUD”

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Market Commentary – May 17, 2010

General Market Comment:   May 17, 2010

(The following market commentary can also be viewed at the following linked pdf file: General Market Comment May 17 2010)

 The market, as I define as the NASDAQ here, is down 7% over that last 21 days.  Are market lore, cycle theories, some market internal measures, fear of a spreading Eurozone crisis and general pessimism sufficient reasons to continue to “sell in May and go away” as the saying goes? 

My read of the data says you may want to think twice before you dash for the exits.

My indicators continue to be consistent with early stages of a bull market that will increasingly be led by technology, i.e. our kinds of companies.  This view is not inconsistent with a notion that the economy – while exhibiting robust year over year gains in all manner of macro economic measures – is still far from performing at its full potential.  This fact bolsters the case for subdued inflation and interest rates – which are conditions that are supportive of rising earnings and stock prices.  

The following chart from Thomson Reuters displays the earnings for the S&P 500 since 2005.

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There are legitimate concerns about the Eurozone debt crisis.  It is not clear to me that the restructuring of the PIIGS debts will either stop European economic growth or drag the rest of the world into a financial crisis.  As the analysts at the Bank Credit Analyst noted – the crisis had reached the “riot point” and hence commanded forceful and coordinated policy responses such as we saw last week and are likely to see more of going forward.  There is much about the crisis that I characterize as being resolvable “with a stroke of a pen”.  Don’t get me wrong – there are fiscal consequences, but central bankers and governments have demonstrated a willingness to act decisively to stop financial panics as has been unfolding in Europe. 

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So, what’s the bottom line? . . . There are many brick masons ready and willing to add to the proverbial “wall of worry” that the stock market has to climb.  There is undeniable historical evidence that the period from May through October is a weak period for stocks but that does not mean that they won’t rise this year.  Stocks rise when earnings outlooks are rising and interest rates are stable . . . kinda like now . . . The recent market correction is not alarming given the youth of the economic recovery, the persistence of easy of monetary conditions and the strength in earnings.

 I stated in April I would not be too concerned if we had some pullback in prices.  I remain of that conviction.  I doubt we will see appreciable downside from current levels failing some exogenous shock to our collective psyche. 

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Please refer to the latest Market Analysis report dated March 9, 2010 entitled “Spring Returns to the Serengeti” on our web site www.aberdeeninvestment.com for more data supporting our opinions on the economy and the market.

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