Monday, February 23, 2009


I'm not a big fan of technicians, particularly when it comes to calling short-term market moves.  And if you've followed my comments over the past 4 months or so, you know that I don't profess to have any expertise in predicting  overall market movements.  My outlook (reiterated below) is that truly long-term investors will ultimately find that today's market presents an extraordinary opportunity for high quality stocks.

All that said, I believe that the stock market is significantly oversold and is likely to rally in the near term.  My analysis isn't particularly sophisticated, but it's based on the observation (mine and others) that markets don't tend to move in the same direction for too many days without some kind of reversal-- even though the reversal frequently represents a countertrend in the context of an overall move.  So I'm not saying that the market won't go lower.  But the -15% move in the past nine trading days is unusual and unlikely to continue without an interruption.  

While I'm certainly not a technician, I do watch certain statistics, and I think that the Relative Strength Index (RSI) is pretty important.  Essentially, it attempts to identify stocks or indices that are short-term overbought or oversold.  Today, the 14 day RSI for the S&P 500 is about 29.  It rarely gets below 30, and the handful of times it's been there in the past ten years have generally produced some good buy opportunities.  

Don't get me wrong:  the market and the RSI could go a lot lower.  The fact that something has followed a certain pattern for the past 10 or 20 or 30 years doesn't mean that it will continue to follow that pattern-- see housing prices for a particularly good example.  But I suspect that even if we're headed to 600 or lower on the S&P, we won't go there in a straight line and won't go there without a decent near-term rally.

Portfolio update:

I started a position in WAG today as the stock traded down to my entry point.   They pay a 1.8% dividend (about the same as the yield on the 5 year US Treasury note).  At consensus estimates of  around $2.00/share this year,  12x earnings seems pretty cheap for a high quality company with a great long-term growth record.  What I like most about WAG is their new strategy of opening walk-in clinics staffed by Nurse Practitioners or Physician Assistants within their stores.  These clinics are open every day and evening.  While they don't attempt to treat serious illnesses, think about how much money could be saved for our overburdened health care system if patients with relatively minor symptoms opt for a visit to their local Walgreens rather than to the physician's office or the emergency room.  President Obama has identified escalating health care expenses as the number one problem in the soaring budget deficit.  WAG's Take Care Clinic sounds like a cost-effective and promising new health care delivery idea.

For those who have recently begun to read YAIO,  I'd like to summarize my overall investment outlook by providing this excerpt from a 12/01/2008 entry: today in high quality stocks will produce substantial returns-- doubles or triples-- in the next two or three years. This is a once in a generation opportunity to acquire stakes in truly world class corporations at deeply discounted prices. They may well get cheaper, maybe much cheaper, in the next year or so. But in 2011, you'll marvel at the fact that you could have bought these stocks at those prices in December 2008.

So what to buy? It's easy. Buy the blue chips. Buy the companies that are the clear worldwide industry leaders. The ones that have the impregnable balance sheets and the multi-decade records of outsized returns to shareholders. It's truly like shooting fish in a barrel. Forget about relative performance. There will certainly be others that outperform. But names like Intel, Boeing, Microsoft, Caterpillar, Coca-Cola, Cisco, and Pfizer (among others) will give you solid double-digit returns or better plus a good dividend over the next few years. They are franchise companies that are rarely available at today's valuations.

What not to buy? Themes. Tips. ETFs. Anything that represents a guess as to the next market tick. Top down ideas like infrastructure or global decoupling. Anything dependent on interest rates, or commodity prices, or the Baltic Dry Index. Don't buy sum-of-the-parts stories, or discounts to NAV. Don't buy it if you have to look up the symbol, or if you can't immediately describe exactly what business they're in. There are just too many exceptional and truly inexpensive companies with virtually zero risk of accounting fraud, or adverse patent rulings, or competitive threats. 

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