Stock Market
All comments and Stock Market Ananlysis are made by Guy Brumley. Guy has been trading the Stock Market daily since 1992.
Trading, evaluating stock prices and predictions
Stock Market Commentary 7-21-2009
The indexes continued higher Monday, with all the averages going positive for the year. The market internals are also extremely positive. The number of new highs reached 146, the highest since last September’s peak. The S&P has had nine consecutive up days, the most since 1998, (just before the market tanked on the Asian contagion).
The rally continues with most individuals on the outside looking in.
This link, http://www.marketwatch.com/story/ti-boston-scientific-to-roll-out-results,
shows how fickle the earnings are. It shows how TXN beats estimates, and goes lower, and BSX beats, and goes higher. INTC, which was last weeks darling goes down with TXN.
Monday’s LEI (Leading Economic Indicators) gained for the third straight month. The market liked the news, and rallied higher. The last time the LEI was up three months in a row, was July 2001. The stock market was flat for the following 12 months. This indicator performed worse in the early 1970’s when it rose for 27 months during the worst bear market since the Great Depression (until now).
Read this link for details.
http://www.marketwatch.com/story/3-consecutive-increases-in-lei-not-always-bullish
Tuesday after the market closes, AAPL announces. Will this be good enough to continue the rally?
For this rally to continue, we need earnings. The key to earnings is two-fold.
First, we need earnings to have a value to stocks. You do not want to invest in a company that is losing money. If a company is losing money, eventually, it runs out of cash and credit, and will have to close its doors. Your investment goes to zero.
Second, you need to define the number of years of earnings you are willing to prepay for the company. This is the multiple. The simple example of this is to use a privately held company. If this company earned $10.00 per share in its current year, you would expect to pay five times that amount or $50.00 per share for the company. This is easy to evaluate. You pay $50.00 per share, take charge of the company, make your $10.00 per share each year, and in the sixth year you pocket the profits.
Here comes the hype. What if the company could grow to double its size and profit? The profits become $10.00, $20.00 and $40.00 over the next three years. A total of $70.00. You get your $50.00, and are pocketing money before the end of the third year. Continue at this growth rate, and you have profits at $160.00 in the fifth year. What a steal!
However, what if the economy goes into a recession and profits drop to $1.00 per share? Your $50.00 purchase now takes 50 years to pay off. Your $50.00 stock price should have been $5.00.
This is how the stock market works using simple math and honesty. Now, add in the snake-oil salesmen, a.k.a. market analysts, and all the numbers get tainted. Growth rates are ratcheted up, as each analyst tries to up stage the last. As the pendulum swings on the growth side, the stock price soars. This is when buyers buy, hoping there will be a greater fool to buy their stock at a higher price. When the pendulum peaks, the earnings disappoint, the multiples contract, and prices fall faster than they rose.
We need earnings, and growth to make this market rise. Watch the total earnings on the S&P, to understand which side the pendulum is on. Know the real earnings number used to calculate the index. Use this link for numbers.
http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS
Invest with a clue.
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