After Standard & Poors downgraded the credit rating of the U.S. Government from AAA to AA+, the Dow Jones industrial average fell yesterday 634 points, or 5.6 percent. This was one of the 10 biggest drops in the stock market on a single day.
I had the unpleasant experience of witnessing the decline through the entire afternoon on the floor of the New York Stock Exchange. In the last hour of trading I appeared from the floor of the stock exchange on Fox Business News.
Almost everyone who appeared on the various networks yesterday --- Warren Buffett, Bill Gross, Dick Grasso, the former head of the NY Stock Exchange, and a number of other famous investors --- agreed on two points:
First, this was sheer, unadulterated panic selling that was not taking into account any stock market fundamentals.
Second, this was a massive vote of “NO CONFIDENCE” in our President, the entire U.S. Congress and European politicians, who are “fiddling, while Italy, Spain, Ireland, Portugal and Greece are burning.”
What Is Foxhall Doing During This Correction?
While the S&P 500 has loss a little over 16% since July 22, 2011, this is still technically a correction. We have to remember that a year ago the stock market dropped over 13.5% in March of 2010 and within a few months recovered and went on to new highs.
I believe the same thing will happen after this correction.
However at Foxhall Capital we are watching your investment portfolio’s every day.
Last week Foxhall did raise cash in all of our equity portfolios that helped cushion some of the downturn a little bit today.
While I don’t think we are entering a long-term bear market, once that is signaled by our Foxhall Trend Recognition Technology, and by our two major long-term technical indicators, we will immediately implement our “Defensive” investment strategy and take the entire portfolio to cash.
Those signals have not triggered yet and, as I mentioned, I do not believe they will trigger.
Why I Believe This Is A Correction That Will Reverse Up Quickly!
When the stock market declines purely because of a reaction to political issues or events, the stock market historically bounces back very quickly.
In the entire history of the U.S. stock market, we have never had a long-term bear market when the following positive fundamentals were as they are today.
Here are the facts:
1. US company fundamentals are improving in almost every area. Manufacturing is rebounding at a 15% annualized rate over the past 3 months.
2. Productivity is at an historic high.
3. S&P 500 companies are now holding a record $2.2 trillion in cash. This cash has the potential to add a lot of momentum to the markets and to the economy in the form of increased dividends, share buybacks, mergers and acquisitions activity and capital expenditures.
4. Profits for S&P 500 companies have exceeded analyst’s projections by over 80% for the second quarter of 2011 and overall earnings for the quarter are up almost 20%.
5. Over the weekend, Bloomberg re-confirmed analysts’ estimates for S&P 500 profits for 2011 and they are still being forecast at a 17 percent annual rate through Dec. 31, 2011.
6. After yesterday’s drop in the stock market, Price Earnings Ratios for major U.S. global blue chip companies are at almost “give-away” prices.
7. Another reason most analysts do not think that a slowdown in U.S. growth will slow earnings growth is that the S&P 500 Index and the Dow is because our two major stock market indexes have effectively decoupled from the underlying U.S. economy. Currently about 50% of revenues and profits of all the S&P 500 companies come from overseas, mainly Asia and other emerging markets. In the end, investors value companies based on their revenue and earnings. The U.S. stock market now reflects the revenues and earnings of U.S. companies selling globally and NO LONGER specifically represents the underlying U.S. economy. Most major companies are still beating earnings and profit estimates and that is the best signal of all for a long-term rising stock market.
8. Even though the US economic recovery is mediocre, the US economy is still growing YTD at a rate of 1.7% and this will probably accelerate through the end of the year to over 2%. This is not great growth, but it is growth, and I do not believe, short of some unforeseen economic disaster, that the U.S. will slip into a double-dip recession.
As I mentioned before, in the history of the U.S. stock market we have never had a long-term bear market or recession with the stock market exhibiting such superior fundamentals.
Slowing US Growth: Is There A Legitimate Concern That The Global Economy Is Slowing?
Government statistics suggest that the U.S and Global Economy are slowing. The big question is, how much longer can investors count on strong corporate earnings to continue their growth, if the global economy is truly slowing?
Fears about a global slowdown worry many investors because of a number of recently released weak economic reports.
The problem is, U.S. growth was probably always this weak; it was just masked by the artificial stimulus of the Federal Reserves’ various stimulus programs. This is probably nothing new, but now we are receiving accurate figures, without the government’s artificial manipulation and distortion.
The U.S. Economy May Already Be Recovering
I have cited some of these points in previous Global Outlooks, but I want to reiterate that I do not believe the U.S. economy is going into a double-dip recession and I further believe we are in the process of an economic recovery over the next two quarters.
I mentioned this yesterday on Fox Business News’ “The Call” and I will be speaking about this issue tonight at 6pm on Neil Cavuto’s prime time TV show on Fox Business News.
I believe we have already hit bottom in terms of consumer spending and over the next few months we will see consumer growth moving up over the next year.
Government statistical reports always show what has happened in the past, but they do not necessarily reflect the future.
Here Are My Reasons Again For Believing The Economy Is Turning Up!
Contrary to recent government reports, I think we are seeing an upswing in consumer spending. Here’s why:
·Profit from General Motors’ recent sales in the second quarter of 2011 in the U.S. rose over 37% to $2.2 billion from $1.6 billion. Overall U.S. sales rose 12% from the previous year.
·The 25 major retailers tracked by Thomson Reuters reported 4.4% growth in July same-store sales.
· Target posted a 4.1% rise in same-store sales last quarter after analysts only expected a gain of 3.7%.
·Costco said its same-store sales climbed 10% last month, while Limited said sales rose 6%.
· MasterCard’s growth in U.S. sales volume was up 9.9% last quarter.
· Visa's credit transactions for the second quarter totaled a 14% increase over the prior year.
· Sales tax revenue from state and local governments rose 4.7% in the first quarter of this year, according to U.S. Census data. I use sales tax revenue growth as a leading economic indicator of the overall direction of consumer spending.
This doesn’t look to me like consumer spending growth is in decline!
I believe this data is more indicative of a rebound in consumer spending than official government statistics. I also believe these reports may be the leading economic indicators pointing to an upturn in consumer spending and hardly reflect the slowdown being predicted by many so called “experts.”
Even With This Correction, I Believe The Stock Market Will Recover And End The Year Up In Double Digit Gains!
Over the past, almost 25 years, I have seen almost forty stock market corrections, but only three long-term bear markets.
Every person I spoke to yesterday on the floor of the NY Stock Exchange agreed that this was one of the most “over-sold stock markets” they have seen in their lifetimes.
As an investor, one must always distinguish between real market fundamentals and “political noise.”
It is ALWAYS a mistake to make stock market buying or selling decisions based on emotion or “political noise.” It is almost always a prescription for losing money.
But I must admit, hanging on while the roller coaster was plunging yesterday took a lot of discipline.
I don’t have a crystal ball, but I do believe we will see the recovery start in the next few weeks.
Join me tonight on Fox Business News at 6pm Eastern Time with Neil Cavuto.
Until then—and I know it is hard…
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