There is still too much cash stashed in bank deposits depriving the economy of investment . . . just think what could happen if $500 billion came off the sideline!

Few people realize the extent of the panic attack that occurred in 2011.  The amount of cash deposited in U.S. bank checking accounts increased by $203 billion in the two weeks of July 25 and August 1, 2011.  In 2008, when the world as we knew it really did almost end following the Lehman bankruptcy, there was only $160 billion of cash stuffed in banks.  There were two events that were the catalysts for the 2011 panic.  On July 25, President Obama gave a speech where he stated the U.S. might not be able to pay social security or VA benefits in August if the debt ceiling wasn’t raised. On August 6, S&P downgraded U.S. Treasury debt.  It is remarkable that the economy and the market have been as strong as they have been since then, as the banks have not recirculated the cash in the form of strong loan growth.  The cash pile has actually continued to increase.  There is arguably at least $650 to $700 billion of excess liquidity sitting in checking accounts earning ZERO.  When confidence is fully restored – and it is now significantly improving – that cash will be available for consumption and investment.  Jeb Terry, Sr. March 28, 2012

The amount of excess cash in M1 is dead money.  When this starts to liquidate-i.e. when the 3 month change in the following chart goes negative – we will see a significant pick up in all manner of investment be it durable goods, cars, housing and stocks.  What we can be absolutely certain about is that no one can retire just sitting on cash and eating seed corn to pay the bills.

Aberdeen Investment Management – a guide service for micro-cap technology investment

Online advertising – a rising tide for years to come . . .

We concentrate on markets where there is a rising tide, where there is measureable new customer adoption with superior double digit growth.  These markets allow multiple adolescent companies to monetize their technology, establish a successful revenue model and hopefully reach scale.  Online advertising is such a market.  It is reaching scale and is nowhere near saturation.  It is growing 3X to 5X more than the mature mainstream advertising conglomerates such as WPP and Interpublic.  Jeb Terry, Sr. March 28, 2012

Within the online advertising market the hyper-growth sectors are social and mobile – I am sure you are shocked.  The Aberdeen portfolio touches these areas of growth via multiple holdings and we are looking for more.

These charts and other can be found at www.emarketer.com

Aberdeen Investment Management – a guide service for micro-cap technology investment

An Update on P/E ratios – are they high? Nope . . .

The S&P 500 is up 11.8% year to date.  This is the best start to a year since 1998.  One might reasonably ask if the P/E ratio has become elevated to a degree that would suggest a correction is due.  The short answer is NO.  The P/E ratio for the S&P 500 remains below the median since 1926 of 15.33X and well below the median since 1982 of 17.08X.  In March of 1998, when we last had as robust a start to the year, the P/E ratio was 24.8X.  The LTM earnings growth was 3.4%.  12 months later earnings grew 7.4%.  Today’s LTM earnings are up 5.3%.  The estimated earnings growth for 2012 is 19.4%.  The S&P 500 would have to be at 1,500 to approximate 15.3X times earnings, 1,660 to approximate 17X.  Jeb Terry, Sr. March 28, 2012

Aberdeen Investment Management – a guide service for micro-cap technology investment

Where is the money coming from that is driving the stock market higher? – it damn sure isn’t mutual fund inflows . . .

One of the more tragic consequences of the Great Recession is the unprecedented flood of retail investment into bond mutual funds and out of equity mutual funds.  The fear / greed cycle pushed all the weak hands into the safety of short term Treasuries at the beginning but since yields were essentially zero, the greed side of the cycle pushed the money on into longer duration bond funds where, as Jim Grant of Grant’s Interest Rate Observer stated, they have “return free risk”.  There are some takeaways from this:  a) there will be a mirror image panic out of bond funds sooner than people realize (2013-2014) as interest rates begin to rise, b) there will be a surge into equities c) the present market is virtually devoid of retail participation, a precondition for a major stock market top d) this is an institutionally driven bull market with hedge funds scrambling to catch up.  As you examine the following chart keep in mind that there is material “gearing” to equity mutual fund inflows.  $10 billion inflow can equal a $50 to $100 billion equity market value increase.  Jeb Terry, Sr. March 28, 2012

Aberdeen Investment Management – a guide service for micro-cap technology investment

Unemployment claims go down, equities go up . . .

One of the better correlating pairs of data not often recognized is jobless claims and equity prices.  As the chart below from Scott Grannis’ blog – Calafia Beach Pundit – shows, there has been a tight negative correlation between rising/falling jobless claims and falling/rising stock prices.  All signs point to more improvement in jobless claims therefore stock prices have upside, ceteris paribus.  Jeb Terry, Sr. March 28, 2012

Aberdeen Investment Management – a guide service for micro-cap technology investment

“S&P Volatility Falls Most Since FDR” . . . said the headline.

Falling volatility has been documented by Birinyi Associates to lead to a rising market over the next 180 days.  The headline I have referred to appeared in an article on Bloomberg that noted that volatility of daily price changes for the S&P 500 has dropped the steepest since 1934.  The S&P 500 gained 41.4% in 1935.  While there may be many factors that will have contributed to that 1935 gain, perhaps the steep drop in volatility was an early indicator that conditions were improving.  Another point made in the article is that the level of volatility is now the lowest since 1995.  1995 is noteworthy in that the S&P 500 gained 34.1%.  Hmmm . . . those two years mentioned, 1935 and 1995, were 96.4% and 91.6% percentile gains going back to 1927.  The chart below ably illustrates that very low volatility has been associated with rising stock markets.  Jeb Terry, Sr. March 28, 2012

Aberdeen Investment Management – a guide service for micro-cap technology investment

Consumer confidence is rising – setting 4 year highs.

The Rasmussen poll for consumer confidence is surging.  There has been a 45% improvement since September 2011.  One can debate the reasons for the surge.  Obvious reasons are improving employment, improving earnings, improving housing market conditions and perhaps a growing sense that the big macro issues of the European sovereign debt crisis and U.S. fiscal distress are not going to lead to financial Armageddon.  We do know that rising confidence leads to good outcomes for housing, retail and stock market values.  Let’s cheer’em on!   Jeb Terry, Sr. March 28, 2012

Aberdeen Investment Management – a guide service for micro-cap technology investment

The Mobile Internet growth is similar to the fixed line Internet growth in the late 90’s

The growth in mobile data usage since the advent of the smartphone in 2007 has been “staggering” according to one industry pundit.  It has caught the cellular providers on their heels. The growth is a mixed blessing – they make more money on their data plans but the traffic surge has overwhelmed their networks.  They are scrambling to find ways to alleviate the exhaustion of their wireless spectrum.  They are experimenting with new pricing plans and data use throttles to encourage customers to use less data – and of course irritating the customers.  The new products coming to market – such as the new iPad are even more data use intensive.  They are looking at multiple solutions as spectrum is just not available.  We are in a period of rabid cellular infrastructure spending not unlike the spending in telecom that took place in the late 90’s.    Jeb Terry, Sr. March 28, 2012

Aberdeen Investment Management – a guide service for micro-cap technology investment

Smartphone adoption continues to BOOM.

Over 6 million smartphones were acquired in December 2011.  The rate of growth of smartphones continues to beat estimates.  With 100 million people now owning smartphones there is furious innovation going on to put content and to enable apps on all those internet connected computing devices – the word “phone” is no longer an accurate descriptor   Jeb Terry, Sr. March 28, 2012

Aberdeen Investment Management – a guide service for micro-cap technology investment