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Steve Selengut
Steve Selengut
Articles (91)  | Author's Website |

How Much Longer Can This Wall Street Toga Party Last?

March 08, 2011

About a year ago this week, just before the one-year anniversary of this market rally, there were about 45 IGVSs priced 15% or more below their 52-week highs. The market seemed to be entering a corrective phase, but it just never happened.

A year later, the market statistics, all of them, are shouting at the top of their lungs --- the correction is coming! The correction is coming!

Portfolio "smart cash" is at pocket-hole-burning levels; less than 3% of all IGVSI stocks are even close to "bargain" prices; new 52-week highs have more than quintupled new lows; and issue breadth has been exceptionally positive.

Those of you who are "in the know" will recognize "smart cash" as the type that is created by targeted profit taking plus dividend and interest income. It reflects an Investment Grade Value Stock Index (IGVSI) that has surpassed its pre-financial crisis record high --- in spite of the fact that all the other averages remain below theirs.

Most (equity heavy) Market Cycle Investment Management (MCIM) program portfolios are at all time high profit levels; income heavy allocations have fallen victim to the buying panic of stock market speculators, higher interest rate expectations, and overblown concerns about state and municipal treasuries.

So, why aren't you taking profits and positioning yourself to take advantage of the new bargains that will (sooner or not much later) be sauntering down the runway?

If you have not been raising cash, or have not taken profits, one or more of these things is happening:

: You are being greedy and have reset your profit-taking targets higher than 10%.

: You don't have profit taking opportunities because you never took advantage of 2008 - 2010 bargain opportunities.

: You were unable to add to your portfolio when prices were lower

: You don't want to be burdened with short-term capital gains.

: You think that the rally is going to last forever.

Clearly, we are still in a rally. But the longer and the faster we surge upward, the more likely that the next correction will be painful --- and there absolutely will be another correction. This rally will celebrate its two-year anniversary on March 9th. How much longer do you think the toga party will last?

Over the past 40 years, if you had purchased Investment Grade Value Stocks during every market downturn and sold every one of them each time they achieved another 10% profit --- just how much better off would your investment portfolio be today?

Always keep in mind that there is no such thing as a bad profit!

Now what is that Market Cycle Investment Management methodology all about?

Steve Selengut



Professional Portfolio Management since 1979

Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

About the author:

Steve Selengut
Steve Selengut
sanserve (at) aol.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

Visit Steve Selengut's Website

Rating: 2.4/5 (7 votes)


Paulwitt - 9 years ago    Report SPAM
I'll risk my p/e 4 stocks going to a p/e of 2. Thanks anyway.

Cm1750 - 9 years ago    Report SPAM
"I'll risk my p/e 4 stocks going to a p/e of 2. Thanks anyway."

What stocks do you have that are trading at 4.0x? And do they trade on any other exchange except the FSE (Fantasyland Stock Exchange)?

Maybe you should also let Prem Watsa know about these unbelievable deals as he obviously missed them given he is 100% hedged on his equity portfolio.
Brianbiggalo - 9 years ago    Report SPAM
I'll sell everything regardless of valuation, great idea!!!

You might be right but if I would have listened to people like you I would have been out of the market at Dow 7400.

I own Wal-Mart it didn't go up what does that mean....buy or sell...

Sell when your calculations of intrinsic value make no sense. Otherwise your a speculator and a market timer!!!!

Good luck!!
Paulwitt - 9 years ago    Report SPAM

A few examples of low pe stocks (numbers from moneycentral.com and yahoo.com)

P/E ratios

LLEN 5.01

HA 3.36

OC 4.89

OSK 4.52

These are just a few stocks I found and I haven't looked real hard. In addition, I know there are a lot of banks under book value. And a lot more U.S listed chinese small cap stocks in the 4-5 range.

As for Prem Watsa hedging - how many gurus are NOT hedging?

Disclosure: I am long LLEN and HA

Cm1750 - 9 years ago    Report SPAM
So you basically do a blind scan with no analysis of future earnings, competitive analysis etc.? That is impressive.

Given 2011 P/E for HA and OSK are 11x and 9.3x, respectively, I can tell you have spent almost no time analyzing these companies.

I guess I should buy stocks based on a blind screen and avoid all that time spent reading 10Ks, listening to conference calls, doing industry research etc.

Paulwitt - 9 years ago    Report SPAM
I don't do blind screens. I do a lot of thinking and a moderate amount of research into each stock that I put into my 30 stock portfolio. I look at the balance sheets and check growth rates. I get some of my ideas from the GuruFocus website. I also read the 10k's (not in depth) and listen to conference calls. I have stocks with moats and stocks without moats. I have stocks that are growth, value, and asset plays (I guess Peter Lynch is my guru!). And as a small investor I use my advantage of speed and ability to invest in tiny companies. I have set positions in tiny stocks because they can go up 100% in a day. (check out SYMX and TA). I've added charts along with the fundamentals. I have some LEAPS and I have a small trading position using leverage in my IRA.

And I've been fully invested for 3 years. I guess I've developed my own style over time. So what's your style?

Cm1750 - 9 years ago    Report SPAM
Sorry if I seemed rude on my last post, but the 4x P/Es you spoke about were an aberration based on TTM numbers and saying there were 4x stocks were incorrect.

Basically, I devote at least 50% of my portfolios to "core" (10%+ size) positions where the risk of permanent loss of capital is low over a 3-5 year period and the expected IRR is 15%+ over a 3-5 year period. I judge each investment separately like they were individual businesses. So far, I have achieved this goal on all but one (still a positive IRR), but have had to be patient.

Other ones are lower-conviction or watchlist stocks.

I have been getting more involved in options like you - usually buying Jan 2012 LEAP spreads on stocks like Pepsi etc. when they dip to low valuations. I also often sell 20% OTM puts to help fund the call spreads so initial investment is minimal and where I would love to buy the stocks at that lower strike price.

There are a thousand ways to invest, but the crash has taught me that owning what you know will prevent panic selling as I did on some of my low-conviction stocks as I bought into PIMCO and others' thesis in early 2009 that a depression was possible (10-15% probability) and it could wipe out equity values.

I also should have loaded the boat when Bernanke talked about QE2 last year, but like Prem Watsa, I think that it may end badly and I tend to try to hold stocks for a multi-year period, so I think I will get opportunities later.

Paulwitt - 9 years ago    Report SPAM
Sorry about not being diligent with the numbers. And thanks for sharing some of your portfolio information.

As for LEAPS, I copied from the Berkshire Hathaway 2010 Annual Report the following:

Both Charlie and I believe that Black-Scholes produces wildly inappropriate values when applied to long-dated options. We set out one absurd example in these pages two years ago. More tangibly, we put our money where our mouth was by entering into our equity put contracts. By doing so, we implicitly asserted that the Black-Scholes calculations used by our counterparties or their customers were faulty.

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