BusinessWeek served up a couple of nuggets from Bob Olstein. He is quoted as saying that "investors need to focus on quality of earnings and choose companies that have been able to generate free cash flow even during the financial crisis."
I may be wrong but my hunch is he would say the exact same thing at any point in the stock market cycle. In fact he pretty much said the exact same thing back in April, 2008 on CNBC making a case for Citigroup.
Anyone can spin this any way they would like but I can't imagine any stock that rallied the full 50% with the market since March, or more than 50%, did do because of cash flow, quality earnings or any other valuation metric. A 50% move in six months, even if it is a new bull and even if it does not go down again, is a panic.
Earnings power does not drive panics. I believe panic drives panics.
In 2007 the S&P 500 was up about 5% (including dividends). If one year is enough time for stocks to outperform because of cash flow and earnings quality then a year like 2007 would be the time for that to happen.
Olstein's thesis in April 2008 focused on Citi and was dreadfully wrong. I do not know what else he owned at the time but I imagine that any utility stocks he owned had attractive cash flow and earnings quality and they did relatively well. I also imagine that any healthcare stocks he owned had attractive cash flow and earnings quality and also did well.
Except they didn't do well because of attractive cash flow and earnings quality they did well because utilities and healthcare almost always do well during large declines.
Stock picker's market? Not so much.
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7 comments:
Roger,
it is a shame that on CNBC there were many questions on Citibank in the '40 for ira accounts and CNBC commentators were commenting that that was a good price and should hold it for betterv times. It may be 5 to 7 years before Citi gets back up to the 40 level and I think that CNBC should be seued for given a bad advide in a pension account.
Regarding Hussmen - he is a great writer but should hire you as a fund manager. However if you get that job, please do not give up on this blog.
Jeff from Milan, Italy
Panic????
I will go with high volatility, but the panic was in the fall of 2008.
I am wrong for calling this a bull market, yet you are correct for calling this a panic???? No bias here.
Can't wait until you all capitulate.
Stock pickers market? Sure, if you can trade as fast as a supercomputer with minimum network latency and move millions of shares thirty micro-seconds before organic-type investors can even register a signal change.
Yesterday, 3,162 different stocks traded on the NYSE yet only four (4) of them comprised 37% of the volume (2.126 billion shares): Two zombie banks and two nationalized GSE's who, arguably, should not be trading at all. (hat tip http://tinyurl.com/m35sop )
In several decades of investing I can't recall seeing action this narrow on this scale ...could just be a sign of the times as the machines take more and more market share so possibly it is just program trading clipping micro-pennies/sh but it could also mask beating out targeted shorts as big players distribute.
Dunno. I do know I could not move out or in of an issue fast enough if a PT algorithm targeted it for the opposite play.
an interesting blog today. yes there are upside panics as well as downside ones. you give the same powerful argument upon which all technical analysis is based. A combination of fundamental and technical analysis layered onto a portfolio that is constructed with a plan in mind works best, don't you think?
Who, in their right mind, expects the U.S. to be the economic leader for the next 5, 10, or 20 year period. If you do, you buy stocks now. If not, you try and figure out what type of cycle we are in.
Random thoughts:
His Excellency, Mohammed of Pimco, compared the present US stock market surge as a "sugar high" on CNBC this morning.Although he has predicted five of the last two downturns, the analogy made sense to me.
Too much debt, too many taxes and little incentive for risk taking does not bode well for our country to be the growth engine it was in the 19th and 20th century.
Why work when the government will meet your basic needs? Banana Republics love this model. So do dictators.
T
"His Excellency, Mohammed of Pimco, compared the present US stock market surge as a "sugar high" on CNBC this morning.Although he has predicted five of the last two downturns, the analogy made sense to me."
Predicting down turns is a lot harder than predicting bull markets IMO. At least the proprietary indicators I am confidant with are much better at giving buy signals than they are at giving sell signals. In other words over predicting downturns seems common to me.
SEG
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