The Enterprising Investors Guide 10-27-08
Please take note, Ockham Research has updated and improved our Enterprising Investor’s Guide newsletter and now give more information to our readers. The market commentary you are used to receiving with Valuation, Sentiment and Asset Allocation analysis, will be on the left hand side with the corresponding charts as well. However, we have now added, throughout the newsletter, articles collected from our blog. Also, the EIG will now be a weekly letter instead of bi-weekly. So, with that said, let’s get started. 
Valuation analysis is most pertinent when the markets are behaving rationally, but as of right now the markets are being fueled by fear and uncertainty. All the same, one cannot ignore valuation because although there may be of minimal importance for the short term, these historically low valuations are extremely important to a long term investor. The price-to-peak earnings multiple has again fallen to a new low of 9.8 times. This is the lowest level the market has hit since we began tracking in 1989. The S&P 500 is continuing its decline as the market tries to find a floor. As soon as the market sees a slight uptick, hedge fund redemptions can and do beat stocks back down. We think that the stock market is nearing a bottom and that the recapitalizing of banks by the Fed should continue to ease the credit crisis. Once banks regain trust and consequently are willing to lend, we could see a sharp bounce back in the market even though there are real and persistent fears of a deep recession.
Our sentiment indicator has also broken new ground in this bear market as the percentage of NYSE stocks selling above their 30-week moving average is just 3%. We view this as a bullish signal because whenever a clear consensus is formed in investor sentiment, history has shown that it’s wise to be of the opposing view. Never have we seen this sentiment indicator so far to either extreme as we have seen in the last month. When you take the largely bearish sentiment combined with the extremely oversold conditions, value investors must at the very least be intrigued. The long term investor must think: these conditions cannot persist indefinitely and cannot get much more extreme, so now truly is a justifiable time to invest. That does not mean that buying anything and everything is wise, but a diversified portfolio of carefully selected stocks will in all likelihood have a nice return over the next 12 to 18 months.
As you may have guessed from the previous two topics, our asset allocation model remains at our most bullish stance possible this week. When looking at the two key metrics of Sentiment and Valuation, there is little not to like about the currently oversold and overly bearish stock market. No one can predict when the bottom will come but what the market needs is a catalyst that will clear some of the uncertainty about the future. The massive and unprecedented government interventions into the economy have yet to be effective, but still have the potential to thaw the credit market and at least provide a minimum level of liquidity to the system until it gets back on its feet. Also, consider the presidential election, which is now just eight days away, looms as a big question on many people’s minds. No matter wins the election, it will solve one more piece of the puzzle and the market could rally for either candidate.
Ockham Research Staff @ October 27, 2008
