Monday, April 20, 2009

Waddell Stimulus Package

The family trip to Disney World has done wonders for Disney shares.  Our adventure last week drove them up 8%.  Orlando appears to be recession resistant since the Magic Kingdom shut the entrance twice while we were there due to overcrowding.  As an analyst, trying to define the capacity of the park multiplied by the ticket price plus accoutrements, I was overwhelmed.  Let’s do some math.  The attendance figures in 2007 across all four parks in Orlando equaled nearly 47 million visitors.  I don’t know what the average ticket price is, but multiply anything by 47 million and it’s a big number.  This excludes accommodations, meals, balloons, light sabers, princess dolls and the obligatory pictures at each ride of your contorted faces as the coasters go into free fall.  It swept through my bank account like a bush fire.  Here is the takeaway: consumerism may be under duress in America at the moment, but I am hesitant to support forecasts of a new, responsible American consumer.  For Disney to be completely sold out with the jobless rate at a 30 year high speaks to the voraciousness of consumers.  Furthermore, with the social safety net spreading wider and wider for “average” Americans, why not spend a little green as the consequences diminish?  And yes, beyond all of the economic musings, we did ride the rides and took about a thousand pictures. 

Did I Miss It?

The markets have continued to climb higher.  Before I address whether it is justified, I’ll offer perspective.  The S&P 500 peaked on October 11^th, 2007 at 1,576.  A year later on October 10^th 2008, in the midst of the financial roller derby, the S&P hit 840, amounting to a decline of 47%.  In my opinion, October 10^th, 2008 marked the true market low as most of the world markets began trending up from there.  For the US, the ultimate low wasn’t reached until March 6^th, 2009 at 666.  Today, the index trades at 867.  Here are some potential ways to view this:

1. “The market has run too far.”  The market today stands 30% above its March low, making it a little pricey to buy at this point.  Sell High!
2. “The market is the deal of the century.”  The market today stands 45% below its 2007 zenith.  Buy Low!
3. “The market has stabilized.”  The market today stands 3% above its October 10^th, 2008 low.  The buying decision today is mathematically equivalent to the buying decision on October 10^th.  Doing nothing seems just fine.

Which perspective appeals to you?  Numbers are just numbers; meaning comes from your interpretation.  Allow me to widen the lens a bit.

Between 2004 and 2008, the S&P 500 fell -2.2% annually.  Since 1927, negative 5 year runs have occurred 8 times (prior to this most recent period).  Here is a table showing the returns of the next five years, following each of these periods.

Time Period        Return (Annualized)            Next 5 years (Annualized)

     1927-31                       -5.1%                                    22.5%

     1928-32                    -12.5%                                     14.3%

     1929-33                    -11.2%                                     10.7%

     1930-34                     -9.9%                                     10.9%

     1937-41                      -7.5%                                      17.9%

     1970-74                      -2.4%                                   14.8%

     1973-77                      -0.2%                                      14.1%

     1998-02                     -0.6%                                      12.8%

So on average, coming out of a negative five year period, markets climbed 14.8% per year, ranging from 10.7% at the worst to 22.5% at the best.  So, what do you think the next five years are going to look like?  If you extend your measuring stick out to five years, the range for the S&P 500 falls between 1,500 and 2,500, representing absolute gains of 73-187% from where we are at the moment.  Interested?

You have not missed it.  Although W&A’s equity model  is now positive for the year*, the S&P is still negative.  If you still have a cash balance, it’s time for your re-entry plan.  Cash needs to be folded in.  Whether the market moves higher or lower over the next 6 months is only relevant emotionally.  The value of the market 3, 5, 10, 20 years from now is what’s truly relevant.  ‘Sell low, buy high’ decision making dominates the retail investor mindset.  Do not allow these tendencies to direct you.  It is not too late.

Mixed Signals

Debate has returned to Wall Street!  The earnings, economic and technical indicators have now become mixed.  A month back, the debate was moot, the picture was bleak and there was no denying it.  Now we have the grist for a bull-bear debate.  I cannot overstate the importance of this shift.  Dialogue has now moved from the Great Depression to the slope of recovery.  While I expected this to occur, I did not expect it so soon.  1^st quarter bank earnings reports have stepped well over the low bar that had been set for them.  Make no mistake; the banks are what this rally has been all about.  The 19 that have been subjected to the stress test have rallied an average of 103% in the last month.  Reality has now confirmed rising expectations.  We will need other areas of the market/economy to join the party to build on this momentum.   Our most important invite outstanding is to the housing industry, and they appear to be considering it.  We will keep you posted.