Market Notes for Cincinnati Business Courier Interview

Notes on Recent Rally:

Prior to the rally last couple of weeks, sentiment was very bearish. Meaning, conditions for a short-term rally were forming.

For example(s), the following were signs of extreme bearish sentiment:

Citigroup Panic/Euphoria Index -0.53 – multi-month lows

Consensus 18% - lowest levels since 2001

AAII 18.9%

Market Vane – lowest levels since 2003

Even the headline “news” -

Jon Stewart taking Jim Cramer to task – is this really newsworthy in ordinary times?

Economic/Government bailout protest on Fountain Square – how often has this occurred in the past?

AIG bonus backlash – people touring the homes of AIG execs – startling!

Don’t mistake recent rally as a new bull market, as bear rallies markets common:

We have seen three 20%+ rallies (from low to high) in the S&P 500 Index

(1) 20% rally from low to high 666.79 to 803.24 in March

(2) 27% rally low to high November 2008 through early January 2009

(3) 24% rally October (2008) low to high

Past bear markets:

1929-1932 - seven rallies that averaged 24% over 40 calendar days

2000-2002 – six rallies averaging 15%, with 3 in 20% range

Looking Ahead to Next Few Weeks

April has been historically strong

-Since 1950 – 68% of April’s have been positive and returns falls 3^rd best (behind November/December)

-Since 2000 – best month with 1.46% average return

Intermediate Term (several months)

Valuations (price-earnings ratios) still “high” relative to past bear markets - 15.81 with a forward price-earnings ratio of 12.42. I would be encouraged with a p/e average 10 to 12 with the lower p/e’s coming from the denominator (earnings rebound). Additionally, S&P 500 yield is respectable at3.55%, but a move to 5% to 6% range this would make stocks extremely attractive investment relative to alternatives.

An interesting note by The Aden Forecast: “On average, banking crises tend to last about seven years, from beginning to end. Unemployment tends to remain a problem for about four years. Housing prices fall for around five years, averaging a 36% decline, while stock prices tend to drop 56% with the decline lasting about three years. Government debt also surges by nearly 90%.” As such, this market is likely to grind for several months as it transitions through this challenging period.

Recommendation

-Remain defensive

-High cash position

-Seek out dividend yielding stocks with a low payout ratio. Also, those stocks should have stable earnings expectations and a low p/e (for capital appreciation upside)

-Energy (SUN, SRE), Defense (RTN, LMT), Consumer Goods (CAG, CPB, PM)

-Guard against inflation - ETFs: GLD, TIP, LQD