Tuesday, October 7, 2008 

HomeFAQsContact Us

About Us
Our Investment Philosophy
Our Governing Principles
Our Investment Process
Our Professional Staff
Our Investment Programs
FAQs
Investment Insights
Commentary
Daily Market Update
Conference Calls
Other Kobren Insight Group Links
Delphi Value Fund
Fidelity Insight
Kobren Growth Fund
www.kobren.com
Stock Market Outlook

The foundation for our near-term view of the U.S. stock market is formed by examining five important drivers of stock prices. While much of the data we review for each factor (such as earnings growth rates, P/E ratios, etc.) are objective, the process of assimilating that data into a view of where that factor falls on the spectrum of favorable to unfavorable for stocks is essentially a subjective exercise.

The current Five Factory Equity Model is also available in PDF format (see below).

Red Shim

Five Factor Equity Model: As of October 2008
Black Box  Current Position        Grey Box  1 Month Ago        White Box Unchanged
   Factor Key
Unfavorable Neutral Favorable
   

Black Shim
One Weak/Decelerating

Strong/Accelerating
  Earnings
Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line

Expectations for third quarter corporate earnings continue to drop. The positive slant, however, is that earnings should be "less bad" than they have been and should bottom by year-end . According to Goldman Sachs, the stock market typically troughs 4 months or so before earnings do.

Black Shim
Two Unattractive

Attractive
  Valuations
Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line

Valuations are at their best levels in quite some time. The S&P 500's current dividend yield of 2.7% is higher than the 25-year average of 2.5%. The current price earnings ratio based off expected earnings is currently 16.5x, which compares to the 25-year average of 21.0x. The current price/book is also cheap.

Black Shim
Three High/Rising

Low/Falling
  Interest Rates
Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line
Interest rates are low, inflation expectations are dropping, and the yield curve is steep. These are all big plusses for the stock market. The Federal Reserve may even lower rates in the near future. This said, the fear expressed in some of the short maturity fixed income markets concerns us, at least in the short term.

Black Shim
Four Extreme Bullishness

Extreme Bearishness
   Sentiment
Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line

Investor and consumer sentiment remains depressed. Typically, these conditions are a precursor to above-average market returns the following 12 months. Another factor which is quite encouraging is that U.S. investors have their lowest allocation to equities since the early 1990s.

Black Shim
Five Low/Falling

High/Rising
   Liquidity
Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line

Of the five factors, liquidity is negative. While traditional economic and technical liquidity measures are mostly positive, the reality is that the markets are still quite concerned about liquidity. Two key rates to watch to alleviate this concern: 3-month Treasury bills need to rise and 3-month LIBOR needs to drop.

  Unfavorable
Neutral

Favorable
   Outlook
Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line Black Line
While we remained concerned about liquidity, our bias entering the fourth quarter of 2008 is net positive. Not only are interest rates and sentiment conditions quite bullish, but earnings and valuations are also improving. Another positive factor is the calendar. The fourth quarter tends to be the best of the year.

 
If you prefer, the current Five Factor Equity Model is also available in PDF format. The PDF will open in a new window. You will need Adobe Reader to view this document - click here to Download Adobe Reader.

acrobat




   PRIVACY POLICY    HOME    TERMS & CONDITIONS

©2008 Kobren Insight Management an E*TRADE Wealth Management Company.