So Far So Good – 2012 following election year pattern fairly closely

 The S&P 500 is up 10% year to date – which is a better than average year although you wouldn’t know it by the sentiment measures.  The following chart from Bespoke Investment Group overlays this year’s performance with a composite of all Presidential election years since 1928.  The inference from the prior pattern is that the S&P 500 could end the year up almost 20%!  Are we in a “stealth bull market”?  Jeb Terry, Sr. July 30, 2012

Note that the S&P 500 is measured on the right axis.  Courtesy of Bespoke Investment Group

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

Spike in 10 Yr. Treasuries price now equates to 66.7X the interest yield! YIKES! This is either “stupid on steroids” or the world is coming to an end. Dramatic spikes in the 10 Yr. “P/E Ratio” in the past have been a prelude to above average stock market gains.

The 10 Yr. Treasury now trades for 66.7X times its annual interest yield.  Without getting into why the rate is so low- recognize that the 10 Yr. “P/E ratio” is now almost 55 points higher than the S&P 500 P/E ratio on forward twelve month earnings estimates.  We have NEVER seen it so much higher than the stock P/E ratio going back to 1970.  There have only been 10 episodes when we have seen sharp 6 month spikes in the Treasury P/E ratio of 25% or more since 1970.  The current move is a spike of 48% in the ratio over where it was 6 months ago.  There has only been one time in the prior 9 spikes when the market was down 9 months later.  The market was up an average of 15% 9 months later in the 8 positive episodes.  The only negative period was in 2008.  If there is such a thing as “reversion to the mean”, then interest rates should be rising soon and / or the stock P/E ratio should be rising sharply very soon. Experience suggests the rising stock P/E ratio will be derived soonest by a rising stock market.  Jeb Terry, Sr. July 14, 2012

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

One Of The Best Stock Market Indicators Just Flashed A Buy Signal Not Seen In 15 Years

Bank of America Merrill Lynch equity strategists just issued a note titled “Wall Street Proclaims The Death Of Equities“.  They point to their proprietary contrarian sell side indicator which is looking very bullish:

After triggering a Buy signal in May, our measure of Wall Street bullishness on stocks declined again, marking the ninth time in eleven months that the indicator has fallen. The 0.8 ppt decline pushed the indicator down to 49.3, the first time below 50 in nearly 15 years, suggesting that sell side strategists are now more bearish on equities than they were at any point during the collapse of the Tech Bubble or the recent Financial Crisis. Given the contrarian nature of this indicator, we are encouraged by Wall Street’s lack of optimism and the fact that strategists are recommending that investors significantly underweight equities vs. a traditional long-term average benchmark weighting of 60-65%.

The Sell Side Indicator is based on the average recommended equity allocation of Wall Street strategists as of the last business day of each month.  The reference to the report came courtesy of Business Insider (here).  The chart of the indicator follows below. 

The bullish signal is the strongest since 1995, a year when the NASDAQ gained 40%.  Once again, similarities to 1995 support my view for a continued bull phase for tech stocks with stand-out growth.  Jeb Terry, Sr. July 8, 2012

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“No need to fear a recession” – The economy has slowed but slow does not equal recession.

The ISM manufacturing and non-manufacturing reports (here) this week were both weaker than expected.  Capital Economics had this to say about the status.

“Although it is very clear that the US economy has lost a lot of momentum, there are no real indications that it will soon come to a complete standstill or even go into reverse. The latest ISM surveys and various leading indicators are certainly consistent with slower economic growth, but they are not pointing to a period of negative growthThe drop in the ISM manufacturing index, to 49.7 in June from 53.5 in May, is not a recessionary signal as historically the index needs to fall to at least 47 to be consistent with outright declines in GDP.  Even that threshold may be too high as the ISM itself states that “the breakeven point…is a PMI of 42.6”

The reports, along with other high frequency economic reports including today’s labor report, seem to confirm an economy growing at a “2ish” percent annual rate.  2% GDP growth is not inconsistent with a rising stock market.  It is actually a good condition for high growth companies in that they stand out like shiny pennies.  This is good for our team of micro-cap technology companies.  I bet you didn’t recall that the NASDAQ gained 40% in 1995 – back when GDP only grew 2.01%!  Jeb Terry, Sr. July 6, 2012

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

No matter what the official labor number is reported to be – private sector jobs are increasing. This is good for sustained, moderate growth which is the best condition for high growth micro-cap stocks to standout and flourish.

There is understandable anxiety about the rate of job growth as we approach the June labor report.  Reports from ADP and the NFIB suggest the anxiety may be overdone.  While job growth could be stronger, it is still “growth”.  It can certainly be said that the labor situation is NOT at a level that has been associated with “tight” job market conditions or those associated with economic tops.  The following charts are courtesy of Yardeni ResearchJeb Terry, Sr. July 5, 2012

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

Business investment is a bright spot . . . up 11 consecutive quarters, 10.8% annual rate, running at an all time high rate.

While investment in structures – both residential and commercial – has been depressed since 2008 investment in equipment and software has been boomingThis is consistent with our portfolio companies’ experience.  Our anecdotal experience with our management teams is that the boom is continuing.  The following chart comes courtesy of Brian Wesbury at First Trust Advisors.  One might suggest we could be at a top.  Another observation could be that it has grown over 2X faster than nominal GDP and helps explain the high business margins.  While the chart does undoubtedly look “high” we need to note that companion economic metrics such as inventories are not “high”  Jeb Terry, Sr. July 5, 2012

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

Mobile marketing – low penetration, high expectations for rapid adoption and increased ad budgets – 70% of survey respondents plan to increase budgets.

A recent survey of business leaders regarding mobile marketing adoption and budgets has revealed that less than 50% of business advertisers are currently taking advantage of the medium.  A recent MediaPost article reported on an April survey by Strongmail.  But get this – “75% of the businesses not currently running mobile marketing programs plan to within a year or more”.  As you can see in the following table, 70% of the survey respondents plan to increase their mobile ad budget over next 12 months.  This contrasts with the fact that 55% of them increased their mobile budget over the past year.   Jeb Terry, Sr. July 3, 2012

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

Despite rally this year, the S&P500 is still testing a multi-decade low P/E ratio on forward 12 month earnings

The S&P 500 has recovered 105% from the Great Recession low of 666 in March 2009.  It is still cheap when examined on basis of the forward 12 month (“FTM”) P/E ratio.  We are still testing the low FTM P/E of the lows in 2009.  We have to go back to Dec 1994 to find a time of a similarly low FTM P/E ratio.  The S&P500 gained 34% in the ensuing 12 months.  The NASDAQ rose 39.9%.  Jeb Terry, Sr. July 1, 2012

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