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Are Stocks Offering You Deep Value or Deep Trouble?

By Stansberry Research Interview Series
Wednesday, January 16, 2008

Trying to sum up the entire market can be a fool's task. Every day some stock goes up and some stock goes down. But long term, the market trades based on expected earnings.
 
As we enter fourth-quarter earnings season, the S&P 500's estimated earnings growth rate is negative 9.5%. Only three months ago, estimated fourth-quarter earnings growth was 11.5%. Things have turned sour very quickly.
 
As you might have guessed, the main culprit is the financials. Analysts have lowered their fourth-quarter estimates for financials by a whopping $33 billion in the last four months.
 
Historically, financial stocks lead the rest of the market. If earnings growth for the fourth quarter does turn out to be negative, it will be the first time we've seen consecutive quarters of negative earnings growth since 2001-02.
 
I'm sure you'll recall, 2002 was not a good year for stocks.
 
That's the bad news. Now the good news: Executive insiders, investing legends, and even companies themselves have been buying up a storm in the last six months.
 
Since August, insider sentiment has been decidedly bullish. In fact, in August and again in November we saw insider buying at levels that historically predict market rallies.
 
And according to GuruFocus, a service that tracks investing legends, Warren Buffett made 16 purchases in 2007: a whopping number for a famously picky investor. Five of Buffett's purchases were new positions.
 
Buffett's purchases don't necessarily signal a market rally. But they do reveal that, like corporate insiders, he's finding value in the market.
 
Finally, 2007 was a record year for stock repurchase programs. In the last 12 months, publicly traded U.S. companies announced an incredible $595 billion in stock repurchase programs, up 59% from last year's already impressive $372 billion. Five sectors – retail, industrials, energy, media, and consumer products – saw a 100% increase in announced repurchases year over year.
 
Now, we can't take that $595 billion entirely at face value. Only about 25% of announced stock repurchase programs are completed. But even then, we're still looking $148 billion. Like individual executives and investing legends, corporate management sees value at current prices.
 
So there's our dilemma. Corporate profits are slowing, but a lot of guys who are much smarter and better informed than us are loading up on stocks right now.
 
If you're a long-term investor (meaning, like Buffett, you wouldn’t care if the market closed down for five years), now may be a great time to buy.
 
But if you focus more on the medium or short term, I'd wait and watch for earnings results over the next couple of weeks. If earnings growth continues its negative trend, 2008 will be a rough year for stocks... no matter what the insiders think.
 
Good trading,
 
Graham




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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%