Source: The New Yorker

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MARKET SIGNALS
Source The New Yorker
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Disclaimer
THE MATERIAL COVERED IN THIS PRESENTATION IS THE
OPINION OF THE PRESENTER AND SHOULD NOT BE
CONSTRUED AS A RECOMMENDATION TO BUY OR SELL ANY
OF THE SECURITIES MENTIONED. INVESTORS SHOULD
SEEK THE COUNSEL OF THEIR FINANCIAL ADVISOR
BEFORE MAKING ANY KIND OF INVESTMENT. THE
PRESENTER MAY OR MAY NOT HOLD LONG OR SHORT
POSITIONS IN ANY OF THE SECURITIES MENTIONED.
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Dart vs. Professional Stock Pickers
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Oil Wells
Often Overlooked Oil
Oil
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Dreco Energy Services Price Graph
31 May 26June 26th July
23rd Aug 20th Sept. 19th
Oct. 15th Nov 29Nov
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Celebrity Stock Picks Beat Mike
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HEADLINE
Lou Dobbs Hosts Moneyline From Window Ledge
Source www.theonion.com
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SINCE WORLD WAR II
Weve had 9 Recessions l 21 stock declines of 10
or greater l 8 stock declines of 20 or
greater What Counts is Corporate Earnings Since
WW II l Corporate profits up 63 fold l Stock
prices have risen 71 fold
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HANG IN THERE
Over the past 30 years the stock market has
produced an average annual rate of return just
under 11. If you were out of the market during
the best 30 months your return would drop to just
3.
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Sources of Long-Term Performance
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HEADLINE
Mason-Dixon Line Renamed IHOP-Waffle House Line
Source www.theonion.com
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Relevant Economic/Financial Issues

• Deficits
• Energy Issues
• Interest Rates
• Domestic Politics
• Valuation Levels
• Inflation
• Investing Demographics

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Deficits

• Budget Deficit
• Trade Deficit
• Weak Dollar

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ENERGY ISSUES

• Oil Gas Prices will remain stubbornly high
• Demand Strong Especially China and India
• Supply Weak
• Increasing reserve decline rates
• Shortage of new prospects

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New Refineries?

• - NIMBY
• - BANANA
• - NOPE

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GULF COAST WETLANDS PROTECTION

• Of Critical Importance
• 1/3 of the nations energy production
• Bulk of Countrys refining capacity
• 30 of Americas Seafood
• South Louisiana is the Nations largest port
• Wetlands are a buffer against storms

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GOOD NEWS, BAD NEWS

• High oil prices will bring continued strong
  business activity for drilling companies
• There seems to be an inverse relationship between
  oil prices and world peace.

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The Yield Curve Projects Acceleration and
Deceleration In Corporate Profits 09/01/00 3
month 6.00 10 year 5.70 Slope -30
basis points Predicting a sharp decline in
corporate earnings. 07/01/03 3 month 0.95
10 year 4.35 Slope 340 basis
points Predicting a huge increase in corporate
earnings growth Spring 2006 3 month 5.08
10 year 4.51 Slope -57 basis points
Projected and end to double digit EPS growth.
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Pretty Good Leading Indicator
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Starting to Shift

• For the first time since the spring of 2006 the
  yield curve has un-inverted
• Short-term rates are now lower than long-term
  rates.
• We should now wait to see if cyclical stocks
  outperform the market.

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Stocks Told The Same Story

• Fall of 2000 Consumer packaged goods stocks
  outperformed the market by about 30. The Economy
  then began to slow.
• Summer of 2006 Consumer packaged goods stocks
  outperformed the market by about 30. What Now?

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The Feds Game of Whack- A-Mole

• The Fed will probably bail out these sub-prime
  mess, but..
• The Next bubbles to deal with
• - Commodities?
• - Global Stocks?
• - Currencies?
• Quote from Yardeni Assoc.

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HEADLINE
Small Businessman Conducts Business on Miniature
Golf Course
Source www.theonion.com
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• Domestic Politics
• The first year of a presidential term is usually
  worst for stocks.
• Ranking
• Third year is best
• Fourth year is second best
• Second year is third best

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PRESIDENTIAL RACE 2008

• Like no other
• No sitting president or vice president is running
• Weve had a Bush or Clinton on the ticket since
  1980

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FEDERAL RESERVE Valuation Model
EPS for SP 500
Yield on 10 Year Treasury Note

Price of the SP 500
93.00

5.95
1560.00
The 10 yr. Treasury Currently Yields 4.55
Forecasted 12 month EPS. 10/09/07
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Federal Reserve Valuation Model
Source Yardeni Associates
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A YEAR FROM NOWWho Knows?

• 100
• _________ 5.75
• 1700

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Todays Public Companies

• Clean Balance Sheets
• Lots of Cash
• Share Buybacks
• Increased Dividends
• Mergers and Acquisitions
• Public Companies Going Private

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Inflation vs. Deflation

• Those industries making significant gains in
  productivity are the ones seeing deflationary
  pressures.
• Consumers are getting more for less.
• Examples
• Dell, Toyota and Wal-Mart
• In 1979 it took GM 41 hours to make a car. Today
  it takes just 24 hours.

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Inflation vs. Deflation

• Those industries that are labor intensive have
  made very little progress in productivity and
  prices for these keep rising.
• Consumers are getting the same for more.
• Examples
• Tulane University, Boston Red Sox and Boudreauxs
  Auto Repair.
• In 1788 it took five musicians to play a piece by
  Mozart (two violinists, two violists, and a
  cellist) and it still does.

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LESS SUPPLY OF STOCKS
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INVESTING DEMOGRAPHICS

• The Pig and the Python
• Very high birth rates from 1946 1964
• Investing Concepts
• - Financial Services
• - Healthcare
• - Leisure

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Source Wells Capital Management
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WHAT DRIVES A STOCK?
Price Earnings Per Share P/E
ratio Using Home Depot for Example
40.00 2.70 14.8x
9/18/06
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A Look At Wal-Mart StockP/Es vs. Earnings
Per Share Over Time
2007 43.00 A PE of 13.0x
3.30 2001 43.00 A PE of 28.6x
1.50 The stock has remained flat as EPS growth
has mirrored the decline in its PE ratio.
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THREE STAGES OF A BEAR MARKET
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Its Not A Stock MarketIts a Market of Stocks
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MYTH BUSTING 101

• Many investors believe that the financial markets
  will suffer when Baby Boomers retire and tap
  their holdings.
• A new study estimates that the total retirement
  assets - including 401 (K) plans, other
  self-directed retirement accounts and
  defined-benefit plans will grow markedly in
  relation to the gross domestic products, despite
  the retirement of the baby boom generation.

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IMPORTANT ISSUES

• Favorable Demographics
• 2000-2003 Bear Market
• Housing Prices Leveling Off
• Changes to Pension Plans

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Summary Points

• Corporate profits and the overall economy seem to
  be cooling.
• The stock market appears attractively priced
  based on interest rates and corporate earnings.
• Gradually the yield curve normalizes as the Fed
  lowers short-term rates and inflation data raises
  longer term rates.

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GREAT READING ON THE SUBJECT OF INVESTMENTS
Popular Books One Up On Wall Street, Peter Lynch
(Simon Schuster) A Zebra in Lion Country, Ralph
Wanger (Simon Schuster) The Money Masters, John
Train (Harper Row)   Analytical Books The
Intelligent Investor, Benjamin Graham (Harper
Row) Security Analysis, Benjamin Graham
(McGraw-Hill)   Sophisticated and Well
Written Common Stocks and Uncommon Profits,
Phillip A. Fisher (Harper Row) The Contrarian
Investment Strategy, David Dremen (Random
House)   Oldies but Goodies Reminiscences of a
Stock Operator, Edwin Lefevre (George H.
Doran) Extraordinary Popular Delusions the
Madness of Crowds, Charles MacKay (L. C. Page
Co.)
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