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dexion10 (29.63)

Market has very little upside - My grand plan for 2009 (second half)

Recs

19

June 17, 2009 – Comments (8) | RELATED TICKERS: SPY , ERY , UPL

 

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On a Fundamental Level - the market is not cheap

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As I said earlier I got too bearish - expecting multiple contraction on top of earnings contractions.

 I do think my prior stance will prove to be right and so I am going to stick with it for the remainder of the year.

Remember my thinking in the fall of 2008 was that the best case scenario for the S&P 500 was 840 at the beginning of the year (15x earnings) and 960 by the end of the year (15x 2010 earnings).

 

The market is not  very cheap here at ~14x next year's earnings...

Currently we're 16x this years earnings and about 14x next years earnings.

We're ~16x Goldman Sachs expected earnings for the S&P 500 ($56), per their end of 2008 forecast I'm not if they've upgraded it (I don't care if they have - cuz if they did they'll just downgrade it later).

 

16 x $56 = 896 for the S&P 500 ... (we're about 10 poitns above that)

Normalized  earnings for the S&P 500 are probably $65 - $75 without a bunch of leverage. 

15 x  $65 = 975 - we're only about 75 points below that.

 

NOW ASSUME

 

1.) THAT PROFIT MARGINS WILL CONTRACT OVER THE NEXT 12 MONTHS (THEY ALWAYS REVERT TO THE MEAN... THEY ARE THE MOST CONSISTENT MEAN REVERTING METRIC).

2.) GROWTH WILL BE BELOW AVERAGE FOR AT LEAST THE NEXT TWO YEARS...


THEN ASK YOURSELF - DO YOU WANT TO PAY 15X EARNINGS FOR THAT ANYWAY?

 

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MY GAME PLAN GOING FORWARD

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I'm buying some discount (WMT, FDO) retailers because the consumer recession will continue for another year. I'm also buying quick service (cheap food) restaurant JACK.

I'm shorting oil related themes via ESV, 3x energy shorts, ARD. I'm only in 1/3 of my desired position because I'd prefer to short all of these things if/when oil hits $75

My ideal shorts if/when the market gets to > 975 would be

Hi Multiple and not profitable semiconductor equipment (LRCX)

High cost oil stocks (WTI)  

Nat gas levered stocks (UPL, SD) - they are reflecting $8 gas

Transportation stocks at high multiples and peak margins (CHRW, LSTR, etc)

 

The three industries I'd love to short on sizable rallies are

1. Refiners (They'd need to rally 30-40% to get me involved again)

2. Homebuilders (RYL needs to rally 25% to get me short)

3. Nat Gas Stocks (not the commodity -  a 10% rally would get me short)

8 Comments – Post Your Own

#1) On June 17, 2009 at 12:18 PM, dexion10 (29.63) wrote:

FYI I suppose I am not being fair with my choice of wording - by "very little upside" I mean 10% upside from today's prices to the end of the year - IF  you can convince somebody to buy the market "priced for perfection"... that is nothing to sneeze at...

My point is at that price - 10% higher the market will be a "perfect short"

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#2) On June 17, 2009 at 12:26 PM, anchak (99.76) wrote:

Always good to hear from you dex....be prudent , stay safe

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#3) On June 17, 2009 at 12:37 PM, portefeuille (99.97) wrote:

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On June 16, 2009 at 11:29 AM, bigpeach (95.20) wrote:

I'd like to smack the person who first calculated the P/E of an index and pretended it was useful. It simply doesn't work well as a valuation metric. The market may need another source of fuel to continue rising, but the P/E of the S&P 500 isn't a supporting reason.

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(see comment #7 here)

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#4) On June 17, 2009 at 12:53 PM, dexion10 (29.63) wrote:

Thanks anchak the market's rise was brutal for me. I was up 100% for Jan to March... now I am only up like 25%. I got too bearish.

I was also reminded that bulls get paid in dollars and bears get paid in pennies... bears shoot for 30%-80%  while bulls make 1000% off of market bottoms (when they buy beaten down distressed value)

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#5) On June 17, 2009 at 3:22 PM, RookieQB (< 20) wrote:

+1 rec for laying your plans out for everyone to see

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#6) On June 17, 2009 at 3:24 PM, checklist34 (99.92) wrote:

i like bigpeaches posts, i haven't seen one in a while.  good quote porte.  the p/e of the S&P 500 is the single most absurdly calculated and used metric ever right now. 

i basically agree that we have 10-15% upside from todays prices as a reaslistic ceiling for 2009.  I also think we have a 10% downside as a realistic floor... 

but i'm often wrong.

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#7) On June 17, 2009 at 4:04 PM, soycapital (89.31) wrote:

I like your idea of buying the discounters and recently purchased some WMT and MCD. Other ideas for discounters you are considering? Also, I think it is a good time to buy established dividend paying global companies that will survive because of the demand for product or service they offer is NOT going to go away. Like PM or DEO for example. I'd not buy them because they sell tobacco and alcohol but just used for an example. UL might be a good choice. Other ideas?

Thanks, Dave

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#8) On June 19, 2009 at 5:48 PM, dexion10 (29.63) wrote:

Soycapital:

 

Thanks for the feedback on my idea of nibbling at discount retails despite my general bearishness. I'm only buying now in 1/3 amounts because the charts are not quite at their supports for (FDO and WMT).

 

I would not buy MCD right now though - I think the valuation is fair and at this valuation MCD will trade with Forex / Currencies... MCD gets a lot of international revs... it'll get cheaper if the bear market picks up steam again because the dollar will probably strengthen.

restuarants like JACK or BKC probably offer better value than MCD currently (but they are 2nd and 3rd tier names).  That said at times they trade at half the valuation of MCD even though in the case of JACK there is much more operational upside in progress and no forex risk.

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