Tuesday, July 31, 2007

Evaluation Time

Okay, here are my cases why you should be bearish or bullish:


-Subprime mortgage issues appear to be spilling into all areas of lending. This fueled today's sell off.

-Companies' increases in earnings have been partially due to major borrowing to buyback stock and buyout or merge with competitors. This means that actual sales growth or organic growth may not be that strong.

-Brokerage's that helped to fuel this bull market are carrying a lot of the bad debt in the form of CDO's. A rise in rates would dry up M&A activity that fueled brokerage earnings.

-Private equity giant Blackstone group has performed poorly since its IPO. If you want more info, read my earlier post about this.

-From a technical standpoint, we are in dangerous territory. I just read a newsletter excerpt that said this:
As Jim Stack of Investech Research noted near the recent highs, "The DJIA has closed higher in 5 of the past 8 trading days, but declining stocks outnumbered advancing stocks in 7 of 8 of those sessions. That type of negative breadth divergence has occurred only 15 times in 75 years – the majority of which were in bear markets." He also noted "On Monday of last week, the DJIA hit a record high while declining stocks overwhelmed advancing stocks by a 2:1 margin." That divergence has never before occurred in market history, though again, lesser divergences have typically been characteristic of weakening markets.*


-Global yield curve is still fairly steep. Borrowing rates are favorable which helps to encourage expansion.

-Global markets and demand still very strong. This helps multi-nationals based in the U.S.

-From a valuation standpoint, many stocks are still relatively cheap.

-There are some great opportunities in financial names. No mortgage companies! I'm talking high yielding, solid institutions like Bank of America and U.S. Bank, which both have a dividend yield of over 5%

-Strong demand in some oil sectors, especially oil service and offshore drillers.

-International markets are still performing well. It wouldn't hurt to shift some money to a global ETF.

In summary, the market as a whole should be okay. Many pro's are advocating buying into this, but I'm not. I have to let the fear shake out a bit. I think that there will be some nice opportunities to make money yet this year, but it will be harder than it was in quarter 2.

*Text from John Mauldin's July 30th Newsletter.

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