Trader’s Narrative

Yesterday, while meeting with Gordon Brown, President Obama said:

What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal, if you’ve got a long-term perspective on it

While cheerleading the US economy and stock market is part and parcel of being the president, that his is a fairly accurate description:

Source: Prof. Robert J. Shiller

And while some are pointing out a dichotomy between Obama’s pronouncement and his advisor Buffett’s description of the US economy as being in “shambles”, there really isn’t a conflict with the two views as long as you realize that the economy and the US market are two different things.

In any case, the data for February and March 2009 are an estimate only and take us down to 12 - which is without an argument a very low P/E Ratio. But not as low as we’ve seen the price earnings ratio go.

In August 1982, the PE Ratio dropped below 7. And in both July 1932 and July 1921 it went below 6. To see that scenario again, the S&P 500 would have to drop another 40-50% to the 430-360 level (assuming earnings miraculously stay the same).

The only time that the PE Ratio has dropped as precipitously as in this bear market was in the aftermath of the 1929 bull market top. At its zenith in 1929, the PE Ratio was only approaching 33 while in the 2000 market top it reached 44.

Finally, I should mention that this isn’t necessarily the way that others calculate PR ratios - Shiller methodology smoothes out the data over 10 years to remove short term volatility.

Here are just a few of the articles from this week’s reading list at news.tradersnarrative.com:

• Was Rick Santelli’s “rant” a pre-arranged PR stunt?
• Buffett’s Annual Letter - worst performance ever
• Lessons From 1921 - what if doing nothing is the best option?
• Gold Based Ponzi Scheme
• In Defense of the Bull Market - wide based indices above November lows
• The Formula That Killed Wall Street
• Consumer Confidence hits basement, starts drilling
• House Prices: Reversion to the Mean (long term chart)
• Soros sees no bottom for world financial collapse

And remember to check regularly since there are interesting links added regularly throughout the week.

Hurry, there is still time to get FREE access to Elliott Wave

To see what you missed, here are a smattering of the articles from this week’s reading list at news.tradersnarrative.com:

• Michael Lewis Prescribes Testosterone to Wall St. Elite
• Baltic Dry Index’s bounce is misleading
• Average 2008 Wall St. Bonuses - higher than 2000!
• Long term chart of the S&P 500 earnings
• Geithner vs. the American Oligarchs
• Think Like the Herd, But Don’t Follow the Herd
• Paul Wilmott’s views on Wall St. Bonus
• Buffett’s metric says it’s time to buy
• McGraw Hill Drops Barry Ritholtz’s Book Critical of S&P role in financial crisis

And remember to check regularly since there are interesting links added regularly throughout the week.

I’ve never seen the bullish percent for so many sectors hit extreme oversold levels as now. Refer to my previous post for a review of how I use to time the market with bullish percent charts.

Lets start out with the bullish percent chart for the S&P 500 index:

The broad market proxy is now lower than it has ever been during the most recent bull market. The same can be said of the NYSE bullish percent and the Nasdaq bullish percent indices. With the former hitting the low 30%, a level it had only reached 6 other times since the early 1990’s. Each time we’ve seen this level, a significant market bottom formed.

I mentioned that the transports were approaching oversold bullish percent levels around 30%. Last week it hit its low of 15%. And now I hear that Buffett has been nibbling in the sector.

I was surprised to see the materials sector index so low:

But there it is, signalling an extremely oversold condition. The industrials sector bullish percent is just a tad lower to 13%:

And finally, one of the strongest sectors during this bull market, the energy sector, didn’t get away unscathed:

Looking through these sectors it is easy to spot that we are at an inflection point here. And with so many sectors oversold, it is convincing also that the general market has reached an exhaustion point in selling.

I left out one area of the market because it should be obvious, especially if you’ve been a regular reader: the financial sector. As I suggested before, the financial stocks has borne the brunt of the selling during this decline and their bullish percent chart as well as other technical indicators point to an amazing buy opportunity.

The Dhando Investor is the sort of book that is easy ignore. The title sounds strange and the cover art offers no real clue either.

To be honest, the only reason I gave it the benefit of the doubt was the author: Mohnish Pabrai. I had heard very good things about him as an astute asset manager so naturally, I was curious.

The book is a very unique take on the old Graham & Dodd “value investing” approach. It is especially valuable when you consider that it isn’t written by a journalist or a professional writer but by someone who has been implementing the investment philosophy he explains.

Like many value investors, Pabrai emulates Buffet. Even going so far as setting up his hedge fund or rather partnership fund, to exactly mimic the legal and fee structure of Buffett’s. He even runs things as a one man team. Exactly the way Buffett did. Thankfully for his investors, the elumation extends to his performance. The Pabrai Funds have gained 28% annual returns net after fees since 1999.

So what is Dhando? It can be summarized as follows: heads, I win; tails, I don’t lose much. It is the business philosophy of the Patels, the Indian caste from Gujarat province, who are reknown in India as businessmen.

I’ve had the pleasure of meeting and befriending a few Patels so I can tell you that the legend is true. They are the original Ferengies. I swear they have business built into their DNA. It seems like they can’t help but make money. It just comes naturally to them. The way, say, chewing gum comes naturally to Paris Hilton.

Anyway, I enjoyed reading Dhando Investor. It not only demystified how the Patels do what they do but it also explained why so many of them own motels in the States. Apparently a quarter of motels is owned by a Patel in the US! In Dhando you also learn about how Richard Branson started Virgin Airlines. Its shocking how little capital it took.

Pabrai also goes into detail outlining his own investment criteria and specific ideas. He takes you on a journey as he first identifies a sector, then zeroes in on one or two securities. In one case he was even a year earlier to the scene than Buffett. I believe that was L-3 Communications Holdings (LLL). Another specific example in the book is Frontline (FRO) a VLCCFs or crude oil shipping company.

In almost all his calls Pabrai is early, leaves a lot of money on the table and still manages to double or triple his original investment.

This is obviously not a trading book but I was surprised at how much I enjoyed it. If you’re interested in investing and want to learn more about value investing, I highly recommend Dhando.