O’Shaughnessy sees big upside, S&P 500 at 900

From a story on Yahoo News.

A rising savings rate and an improved housing market, while not completely healed, point to brighter times ahead in the U.S. economy, O’Shaughnessy told Reuters in an interview.

“I do think that as all that coalesces, you see a good chance for the S&P 500 (at) 900 out of the year. What are we right now? 713? That could be a very nice rally,” he said, in reference to Wednesday’s closing level for the S&P 500.

Does he realize that we started this year at 931?  And while I agree with him that we could have “a very nice rally” I don’t think this is the time to be buying.  There’s too much downside risk that isn’t priced into the market.

For example as I detailed a few days ago, Standard and Poors is still estimating 2009 earnings for the S&P 500 to come in at $64.37 – a whopping 31% increase over the 2008 earnings of $49.04.  I just don’t see that happening, so stock prices will adjust lower as the earnings estimates are eventually lowered.

I also disagree with his premise that we’re seeing “an improved housing market”.  Foreclosures have been held down artificially for the past few months as Fannie and Freddie had a foreclosure moratorium in place, as did some states and banks.  Those programs will be ending, and we’ll see the foreclosure rate skyrocket as Obama’s housing bill turns out to be ineffective.

I say it’ll be ineffective because the only thing that will heal the housing market is a bottom being established on prices. And that can not, and will not happen until foreclosures are allowed to go through to establish the true value of houses in each area.  Any government program is bound to fail, because they’re seeking to establish another artificial boom.  And that’s what caused this mess in the first place.

A rising savings rate IS a good thing, but that doesn’t “stimulate” the economy as fast as someone purchasing a new car or remodeling their home.  Savings bear fruit in years, not months.

“The problem with today is everybody’s fighting the ‘Where’s the bottom?’ fight. If you try to keep a relatively longer-term perspective, which is three to five years, you get shouted out … From our point of view the market is even more compelling than it was when we spoke at the beginning of the year.

“Yeah, we could go down some more here in the short term, but it only makes the ultimate valuation more and more compelling.

No doubt about it, “you get shouted out” if you talk about a 3 to 5 year time frame – because it’s wrong.  If you bought and held stocks anytime since 1997, you’ve lost money.  In many cases, a lot of money.  And that’s not an investment.

“The market is even more compelling than it was when we spoke at the beginning of the year.”  He is 100% correct on this – but anyone who listened to his self serving BS at the beginning of the year has lost more than 25% of their money.  Not a brilliant move, no matter how “compelling” the market appeared at the time.

As to making “the ultimate valuation more compelling” he’s correct – but that’s been the case forever.  Look back at the beginning of this blog, where I said Doug Kass was wrong when he said “Buy the Financials. Yes Buy.” back in January of 2008.   The S&P Financial index (XLF) was over $27 back then, and he said it was a good deal with good valuations.  Today XLF closed at $6.24.  That’s definitely a more compelling valuation, but you would’ve lost 77% of you money if you bought XLF because of it’s “compelling valuation” in January 2008.

Long term investors shouldn’t be trying to pick the bottom – leave that to day traders.  Long term (I’ll use the same 3 to 5 year time frame as O’Shaughnessy) you simply buy when the 75 day EMA crosses over the 200 day EMA.  And you sell when the 75 day crosses back below the 200 day.  It’s easy.  And virtually foolproof.

Check out a chart of the S&P 500 with these EMA’s here.  When the red line (the 75 day EMA) is higher than the green line (the 200 day EMA) stocks are trending higher.  You buy as soon as possible after that happens.  The reverse is true in a down trend like we’re in today.  And the distance between the 2 lines is not getting smaller yet, so long term investors shouldn’t be anywhere close to buying back in.

In short, if the earnings are down, the market will follow eventually.  And when earnings rise, the stock market will also eventually rise.  But that ain’t happening now, so stay on the sidelines.

gk

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