Source: The New Yorker

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.

• We are not entering another Great
Depression. Following the Stock Market crash of 1929 the government:
-raised taxes, increased interest rates
-Today we are doing just the opposite

• Averages 14 months in length
• Economic activity declines by 2.5%
• Unemployment rises by 2%
• - If unemployed, the average tenure is six weeks.
• We’ve had two recessions in the last 25 years (early 1990’s and 2000 – 2001).
• They always end and the economy always rises to a higher plateau.

Spring 2008
$170 Billion Tax Rebates
Fall 2008
$350 Billion Drop in gas prices
January 2009
$790 Billion Economic Stimulus Plan

We’ve had 10 Recessions
• 24 stock declines of 10% or greater
• 13 stock declines of 20% or greater
What Counts is Corporate Earnings
Since WW II
• Corporate profits up 63 fold
• Stock prices have risen 71 fold

Oil
Often Overlooked Oil

31 May 26June 26 th July 23 rd Aug 20 th Sept. 19 th Oct. 15 th Nov 29Nov

Over the past 30 years the stock market has produced an average annual rate of return around 10%.
If you were out of the market during the best 30 months your return would drop to just 3%.

“People generally feel a stronger impulse to avoid losses than acquire gains.”
Michael Pompian, CFA
S&P 500 Index
Average Equity
Investor Return
3-yrs. 5-yrs. 10-yrs. 20-yrs.
-8.36% -2.19% -1.38% 8.43%
-10.38% -2.84% -1.57% 1.87%
Data through 12/31/2008

Stock, Fund or
Money Manager
Selection
5-10%
Asset Allocation
90-95%
Portfolio Rebalancing Makes a Big
Difference

• It all started with the housing bubble
• We have about 1.5 million too many homes
• This is about 12 months worth of sales
• Much of the problem is regionally based
• A dramatic slowdown in building and an increase in housing affordability is what eventually will solve the problem.

Source: www.theonion.com

1. Energy Issues
2. Interest Rates
3. Domestic Politics
4. Valuation Levels
5. Investing Demographics

• Oil & Gas Prices will remain stubbornly high
• Demand Strong – Especially China and
India
• Daily World demand dropped from 86 million to 81 million barrels in the past year.
• Supply Weak –
– Increasing reserve “decline rates”
– Shortage of new prospects

•
•
•

• A barrel of oil usually sells at about 8 times an mcf of natural gas. That ratio is now 20 times. Either oil prices are too high or natural gas prices are too low.
• The past weakness in energy prices is causing a big decrease in drilling plans and lays the groundwork for future price spikes.
• There seems to be an inverse relationship between oil prices and world peace.

Gulf Coast Wetlands
Of Critical Importance:
• 1/3 of the nation’s energy production
• Bulk of Country’s refining capacity
• 30% of America’s Seafood
• South Louisiana is the
Nation’s largest port
• Wetlands are a buffer against storms

Fall 2000
3 month 6.00% 10 year 5.70%
Slope -30 basis points
Predicting a sharp decline in corporate earnings.
Summer 2003
3 month
Slope
0.95% 10 year 4.35%
+340 basis points
Predicting a huge increase in corporate earnings growth.
Summer 2006
3 month
Slope
5.10% 10 year 4.50%
-60 basis points
Projected an end to double digit EPS growth.

Current Slope +335 Basis Points
Ten year treasury note (3.50%) minus
3-month treasury bill (0.15%)

Consumer Confidence Vs. Reality
The 1982 recession was the worst since the Great Depression. Consumer confidence is now 20% below the level it was back then.
1982
Unemployment 11.0%
Inflation +10.0%
Ten-yr. USTN 14.0%
Now
9.7%
+ 2.0%
3.50%

• Painful Layoffs
• Credit Markets Gradually Thaw
• Merger and Acquisition Activity Heats
Up
• Newly Streamline Companies. Small
Improvement in Business Brings Much
Larger Improvement in Profits

Standard & Poor’s 500
+83%
+99%
-26%
-6%
Bush’s First Term
Bush’s Second Term
+26%

Stock Market and Business Cycle
Many stocks are cyclical in nature.
They tend to perform better in specific stages of business cycles. Forecasting these cycles can help to put you in the right stocks at the right time.
Consumer Staples
Excel
Source: Fortune Magazine: 3/21/94

‘Wheel of Fortune’ Contestants Hit
Hard as Vowel Prices Skyrocket

• THE BAD NEWS: 40% of the Country’s skilled workers will be eligible for retirement in 2010.
• THE GOOD NEWS?: Thanks to declining 401K accounts most everyone will keep coming to work.
• PERHAPS consider a “sabbatical”

EPS for S&P 500
Price of S&P 500
=
Yield on 10 Year
Treasury Note
$50.00*
10025.00
= 4.85%
The 10 yr. Treasury Currently Yields 3.50%
*
Forecasted 12 month EPS.
9/09/09

In February of 2009 Gold sold at $1000 an ounce and could then be exchanged for some pretty useful stuff.
-150 shares of General Electric or 25 barrels of oil
-Today an ounce of gold could be exchanged for 67 shares of General
Electric or 13 barrels of oil.

Mason-Dixon Line Renamed
IHOP-Waffle House Line
Source: www.theonion.com

“Tis Double Death To Drown In Ken of Shore”
-Shakespeare
-
Twelve other Bear Markets since 1955
-Average decline was 22% and lasted 11 months
-These were followed by recoveries averaging 12-month in length and producing 35.0% returns.
-This is about 1.5 times the decline
-There are Trillions of investable dollars waiting on the sidelines.

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

Price
Earnings Per Share = P/E ratio
Using Home Depot for Example:
$27.50
$1.45 = 19.0x
08/12/09

2007 $43.00
$ 3.30
= A PE of 13.0x
2001 $43.00
$ 1.50
= A PE of 29.0x
The stock has remained flat as EPS growth has mirrored the decline in its PE ratio.
In 2001 Wal-Mart shares were “ahead of themselves”.

Stage
1. DENIAL
2. REALITY
Characteristics
Economy shows signs of slowing and stocks fall from their highs, sometimes sharply.
Investors shrug it off and act as though the bull market will last forever.
Stocks continue to decline. Investors start to realize how weak the economy really is.
3. SURRENDER Fear of deeper losses and a recession become so worrisome that investors give up on stocks, setting the stage for a rebound.

• Procter & Gamble: The Panic of 1837
• General Electric: The Panic of 1837
• General Motors: the Panic of 1907
• United Technologies: The Great Depression
1929
• Fed Ex: The Oil Crisis of 1973
• Microsoft: 1973 – 1974 Recession

GNP vs. Stock Market Valuation

The Future Has Not Been Cancelled
• Our economic problems are not insurmountable.
• Have patience, this turnaround will not happen overnight.
• The stock market is about 6-9 months ahead of the economy.
• Capitalism Works. The human drive to succeed is very powerful.

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)
The Little Book That Beats The Market, Joel Greenblatt
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)
Great Investment Websites
Bloomberg.com
Investopedia.com
NPR.org (Planet Money)
MotleyFool.com
Seekingalpha.com YahooFinance.com