Blowing In The Wind, Prevailing (That Is)

Bob Dylan (and Nick Picini) have it right:

The answer, my friend, is blowing in the wind.

It wasn’t all that long ago that I wrote about the Perfect Storm at the turn of the century that brought the NASDAQ to its knees. Perhaps ankles? Some of you will have difficulty remembering that the NASDAQ index peaked at 5132.52 and I penned an article that described the advent of 365/24/7 … news anchors with stock market indices displayed in their arm pits during the national news … and a flurry of hyper attention to investing, much of it the get-rich-quick flavor. And over the next lost decade, we watched as the greed and fraud decimated a housing industry all the while insulating the largest rhinos from risk while guaranteeing reward (at our collective expense.)

Is it any wonder that true wannabe investors are disenfranchised and frustrated?

And now we get a dose of one of the largest storms in history as Sandy lands with incredible fury. We pause and hope that the east coast — although in some cases will never be the same again — in others, resilience and restoration will display the best attributes of our humanity and generosity as a nation.

We don’t get hit by hurricanes in Michigan. (At least not very often) But those 70 MPH winds, coming from the northeast for a period of DAYS are something quite unusual. 20-foot waves crashing into Chicago from Lake Michigan are pretty rare, too.

But the prevailing winds come from the west. This storm of considerable magnitude, will pass — and so will the turbulence in stock markets and investing. The only thing that we can do is discover and prudently own the best companies. Those who do will be smiling when the prevailing winds return to their “normal” direction and amplitude. And although we don’t invest in markets (I’m eternally grateful to Ralph Acampora for talking a Detroit audience out of index fund investing back in 2000) a closer look at the primary three characteristics (think prevailing winds) for the overall market can be comforting and reinforcing.

Sales Growth Trend and Forecast

  • The long-term trend/forecast for top-line growth is 4%. (This universe is pretty close to the S&P 1500 or Value Line 1700 ex-Financials)
  • The impact of the Great Recession (2008-2009) is pretty clear.
  • The recovery has been sluggish, “muddling through” according to John Mauldin.
  • Recent forecast revisions have put considerable pressure on 2012-2013 expectations, consistent with the top-line warnings issued by Barry “The Big Picture” Ritholtz and Joshua “Reformed Broker” Brown.
  • One way to look at a “New Normal” is to observe the ~6% growth pattern pre-2008 and contrast it with the 2011 (and beyond) pattern that seems to more closely resemble ~3%.

Profitability Trends

  • Once again, the impact of the 2001 and 2008-2009 recession is clear. Profitability gets hammered.
  • It’s also clear why this recovery “feels like a recession.” Look at the weak recovery during 2010-2012 and note that 2012E is now below that long-term trend (productivity renaissance) and the 2013E forecasts are steadily weakening.
  • Note: The 2016E is a single opinion, Value Line, and possibly represents considerable unbridled optimism. (We hope they’re right)
  • We have seen the typical/traditional erosion of profitability expectations for 2012 as the year winds down. But check out the 2013E forecast. Keep in mind that forecasts for 2013E and 2014E are typically pretty exuberant right about now — year-in and year-out. Squint all that you want. You won’t see a whole lot of exuberance in the 2013E forecast and keep in mind that this is eroding as rhinos update their analyses going forward. We’ll continue to watch and hope that somebody stems the erosion tide.

Valuation: Historical and Projected P/E Ratios

  • This is actually something of a bright spot. Previous collective P/E forecasts for 2012E and 2013E were actually lower — and have improved in recent months.
  • Note that the P/E forecasts dove tail with the ebb of the sales growth trend and that “New Normal” conditions for the foreseeable include lower P/E expectations for the collective.

We’ll never think of “Sandy” the same way again. It seems like there’s a hundred songs of the same name, from John Travolta’s Greasy rendition over Olivia Newton-John, preceded by Graham Nash, Harry Chapin, The Carpenters and Bruce Springsteen. Closing, I’ll go with The Boss:

“Sandy … the aurora is rising behind us.”

Our thoughts and prayers go out to those in Sandy’s wake — and we look to better days ahead … and prevailing winds, in the right direction.

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