Let’s move on.

Dear Subscriber-Friend –

This morning the market is bouncing higher.  We are attentive.

We’d like to address some timely and good emails that we have received about SHORTING the market….

Here’s an email we received this early morning and it mirrors the good ideas and questions of others that we received over the weekend –

“Hi Eric,

I am a new subscriber and am still getting familiar with your style, but it seems like we need to have a short strategy for this market which is down now for about the past 6 weeks.  I know that you are mostly out of the market now.  When would it be a good time to short the market?  Or are you against shorting the broad market and only do opportunistic shorts like the last silver short”

SMC response –

“Hi  – First you need to know that I like very much to get feedback like yours.  You emphasize the “we” and you are looking for strategy.

When the market is down 6 weeks in a row, we can’t start shorting it.   The stocks and the market are down too far.  The short covering rallies that come eat the latecomer’s lunch EVERY time.

We will short the broader market, but we missed the short on 5/10 and 5/31.  Click here to see when those points were – those points were the days of strength that we used to exit our long positions.  If we have shorted the market at the same time as we had terminated our longs – we certainly would be looking great right now.  But remember that the market has been very resilient and has eaten-up short sellers for 2 years.  We were satisfied with our silver short and to exit our long positions on strength where we could.   Now the market is down near the 200 day moving average AND acquisitions are still taking place right and left like yesterday at a +40% premium to the market = VF buying Timberland.   On a valuation basis we need to be looking for opportunistic purchases.  Ford Motor Co. down here in the $13’s…  BAC down here in the $10’s… On the other hand we have this crazy government and huge uncertainty with fiscal policy …   We also have signs globally of a economic slowdown. …”

That’s right – You heard it here … “Opportunistic purchases”.   On the one hand, this market needs to shed shareholders  who are satisfied with their gains over the last two years and some who have said, “If or when my portfolio value gets close to what it was in 2008, I’m selling and never buying stocks again.”  For some people, they are at that place emotionally now – even if the value of their portfolios still aren’t quite what they were.  At the same time,  the enormous uncertainty created by the U.S. federal government’s fiscal policies and the Federal Reserve’s quantitative easing programs have created an environment for investors that is very confusing – more confusing than ever before in their lifetime.

But on the other hand we know this-

1. Companies are paying very strong premiums in their acquisitions of other companies.  They are judging the value of corporations MUCH HIGHER than the overall market. VF’s acquisition announcement yesterday of Timberland Co. at an approx. +40% premium is yet another good example.
2. Earnings at corporations are fantastic.  Why shouldn’t they be?  Companies have harnessed the productivity enhancing tools of technology (internet, logistics, design tools…) and have only selectively added to payrolls.  Margins are strong.
3. More than ever, companies have found ways to strengthen their bottom lines and advance their businesses.
4. True – “Growth” at growth stocks is not being rewarded by the market, and the shares of growth stocks HAVE pulled back with the overall market in a predictable fashion, but pullbacks have been orderly and in no way laced with FEAR.

So we are left to our own devices to balance value stock opportunities AND look for growth stocks AND be opportunistic with situations as they come, while timing the market carefully and looking out for the sky to fall if there is a sudden imbalance due to troubles with U.S. government fiscal policies … etc…

Look at Ford Motor Co. stock (Ticker: F).  On a trailing 12 month basis, its earnings per share looks like this (most recent listed first) –  $0.62, $0.30, $0.48, $0.68 = totaling $2.08/share.   The share price today is $13.50/share.  $13.50/$2.08 = Price Earnings Ratio of 6.49.  Dear friends, that is cheap.  It is a value play with an excellent CEO.

What about Apple, Inc?   Share price today = approx. $331/share and basically FLAT for the year.  Earnings however are strong and getting stronger (competition too, however).  On a trailing 12 month basis, Apple’s earnings look like this (most recent listed first) – $6.40; $6.43; $4.64; $3.51.  IF Apple can hold $6/share for the next 4 quarters ahead, that’s $24/share in earnings.  $331/$24 = Price Earnings Ratio of 13.8.  Not to mention their boat load of cash on hand.  Let’s say Apple has approx. $40 billion in cash and near cash assets and 924 million shares outstanding.  That’s almost a $43/share value – in addition to very strong growth.  If they have nearer to $30 billion in real cash, that is still $32/share.  Take $331-$32= $298/share / $24 and the P/E looks like this = 12.  Therefore Apple, Inc. shares are also very cheap.

Sure, the market can continue to go down, and the most likely catalysts in our minds would be –

1. Sudden downgrade in U.S. treasuries to AA+ from AAA.  That would shake up the financial markets in general.
2. U.S. government mis-steps.
3. Geo-political event.
4. Stronger negative data on the condition of the economy

But remember – the broader market is priced NO HIGHER than at the end of 1998 / beginning of 1999, 12 years ago.  In the mean time, earnings are very strong.   We cannot afford to be “permanent -bears” or “permanent -bulls” – we simply do our best to keep a very accurate pulse on the market, take opportunities as they come and share as much as possible about how we are seeing the market and individual opportunities.

Your – Stock Market Companion

Today we read this about K-Cups in Maine … Click here for the Barron’s article. K-Cups are the single-serving coffee packages that fit the Keurig Coffee Machines.  See Keurig.com for details.    The single serving coffee is quite a phenomenon.

1. No mess, no measuring … just add water to the machine.
2. Fast
3. High quality coffee
4. Lot’s of different flavors
5. Long shelf life