Stock Market Got You Nervous?
S&P 500 Says Smooth Sailing

Stock market making you nervous? Why the S&P 500 says it’s smooth sailing from here.Yes, I know all the news today is about the audacity of a Greece Referendum on getting free money (I talk about that in “Michael’s Personal Notes” below), but there are two stock market-related important news items I want to share with my readers first.

The third quarter ended September 30, 2011, marks the 11th straight quarter that the corporate earnings of the S&P 500 have beat analyst expectations.

Abby Cohen, senior U.S. investment strategist at Goldman Sachs Group Inc. (NYSE/GS) said yesterday that the S&P 500 is trading at a 33% discount to past periods of similar inflation. I’m not one to put much faith in the forecasts or statements of other analysts, but we need to put into context what Cohen is saying relative to corporate earnings at the S&P 500.

The S&P 500 is trading at 14.9 times current corporate earnings; not cheap, but not expensive either. However, the S&P 500 is trading at only 12 times estimated earnings for the 12 months ahead. With the S&P 500 beating analyst’s corporate earnings expectation 100% of the time over the past 11 quarters, achieving estimated earnings in the current quarter and the next three quarters of 2012 is not a stretch.

Dear reader; this is what I’m saying to you about stocks, as we enter the final two trading months of 2011:

The S&P 500 is priced at 12 times future earnings, an historic bargain. The dividend yield for the S&P 500 is presently 2.2%, better than what you can get on a 10-year U.S. Treasury (I’d rather own the S&P 500 than a 10-year U.S. Treasury for the next 10 years).

No, stocks are not a screaming bargain. But when you look at the interest rate environment today, when you look at the alternative investments to the S&P 500 and the Dow Jones Industrial Average, you realize that stocks are not a bad place to be, especially when the S&P 500 continues to surprise analysts and investors with corporate earnings that consistently beat estimates.

Please, don’t let the daily gyrations of the stock market influence you. Historically, stocks are undervalued compared to their corporate earnings and the present interest rate environment. Bullishness does not prevail amongst stock advisors and investors; in fact, bearishness does (see Forget the Economy: These Companies Are Still Earning Big Money).

These big daily losses and gains for the S&P 500 and the Dow Jones Industrial Average are a way for active traders to make a lot of money. While I realize it’s nerve-wracking to see the value of your investment portfolio fluctuate so much on a daily basis; but remember the more the daily markets fluctuate, the more money the day traders make. Traders want markets that move one percent to two percent a day!

For investors like you and me, there is very little evidence that the bear market rally that started in March of 2009 is over (see Strong Corporate Earnings and the Bear Market: How it Will Play Out).

Michael’s Personal Notes:

All the financial news this morning and yesterday was focused on the Greek Prime Minister’s idea for Greece to have a referendum on the Europe Union’s financial rescue package.

It’s a good thing.

The euro, my dear reader, is in jeopardy. When I travel to Europe each year (twice so far in 2011), I can’t understand how 17 countries, all with different goals and aspirations, can share the same fiat currency. It’s quite unbelievable how economically rich and poor countries share the same money.

Italy’s primary goal these days is to increase tourism. Germany’s goal, from what I can see, is to become the leading economic growth engine of Europe, with the headquarters of all the major European manufacturers (think cars) located in Germany.

The obvious is the obvious. Under the pressure of German Chancellor Angela Merkel and French President Nicolas Sarkozy, European banks agreed to take a 50% haircut off the value of their loans to Greece. Merkel and Sarkozy spearheaded an unprecedented European Union bailout of Greece.

And what does the Greek Prime Minister do? He throws a big wrench in the plans: he wants his people to vote on it! He wants his people to vote on getting free money!

While frowned upon by equity analysts and the media, a Greek referendum is sheer genius.

Here’s what a Greek referendum on the proposed European Union’s bailout of Greece does: it signals that democracy is important in Greece, it solidifies the Greek Prime Minister’s popularity (Andreas Papandreou’s popularity among voters plunged after he introduced so many austerity measures), and it confirms that Greece wants to be part of the euro currency. And that is what it’s all about…making sure the euro survives.

Greece has a sweetheart of a deal: Greece will receive about $180 billion and enjoy a 50% write-down in the value of its debt. It literally is free money. The Greek voters are not stupid. They know the severe repercussions if Greece doesn’t accept the European Union-led bailout. What this vote really does is strengthen the euro, something that will make the Chinese “lenders of last resort” very happy.

Where the Market Stands; Where it’s Headed:

Nice way to start a month…

The Dow Jones Industrial Average plunged 297 points in its first trading day of November. For the record, the Dow Jones Industrials gained 12.5% in October…one of its best months on record. In October, the stock market rebounded from the severely oversold level I had been writing about the past few weeks.

No, the bear market rally in stocks that began on March 9, 2009, is not over. The stock market doesn’t roll over and collapse when stock advisors are bearish and when investors are so worried about the economy and the stock market.

We are still in a Phase II bear market. During this phase, the stock market moves higher during a rally that can last three to four years. The purpose of the rally is to bring stock market investors back into stocks with the false sense that the economy is recovering.

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.” Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.  Many gold stocks recommended in Michael’s advisories have experienced spectacular gains.