Investorwalk

2009 prediction: mid-year report card

At the beginning of the year I presented my nine market predictions for 2009. For this article, I will give a mid-year report card on these predictions as well as any updated thoughts for the rest of the year. Each of the nine predictions are shown exactly as they appeared earlier in the year followed by a grade and update as to my thoughts:

 

1)      Equity markets will have high volatility as compared to history, however, they will be at diminished levels as compared to 2008. My expectation is for a relatively strong beginning and end of the year with a difficult middle of the year where markets will break through the prior lows of 2008. The beginning of the year’s market will be fueled by increased optimism over a change in administration, a large $750B-$1T stimulus package and a belief by investors that things can not get any worse. In the middle of the year, a realization will occur that things are not improving as quickly as expected and that although the stimulus package will improve growth over extremely low levels in the first quarter it will likely not be as high or as quick as many had hoped. Finally, towards the end of the year, equity prices will once again move higher as consumer confidence finally begins to return very late in the year. Overall, I am expecting a small to moderate decline (0 to -15%) in equity markets in 2009 with a very strong market (20%+) in 2010. That being said, 2009 will be a year that strong stock pickers can significantly outperform the overall market as pockets of stocks record strong gains.

The Golden Cross & The Nasdaq Composite

As promised earlier, here is an analysis of the Golden Cross and the Nasdaq Composite as a follow up to my previous analysis of the Golden Cross & the S&P500.

You Don't Need an Informational Advantage - Only an Emotional One

One of those oft-repeated investing "truisms" is that since big companies like Coke or Microsoft or Apple each have a million analysts covering them, there is no way to have an informational advantage and hence you shouldn't expect out-sized gains from investing in these stocks. The market is too efficient for that when it comes to big companies.

Sure this makes intuitive sense. It would even be true if the market were in fact efficient. I would hope that most folks have observed enough ridiculous pricing in the market over the past few years as to dispel any notion of efficiency.

Apparently the folks at the Motley Fool were not among those observers. They wrote an article yesterday touting one of their "Global Gains" picks that is up 200% since October.

The Golden Cross & The S&P500

On June 23rd the rising 50-day simple moving average of the S&P500 will cross up and over the declining 200-day simple moving average.  In technical parlance this event is called a "Golden Cross".  In previous posts I've touched on the simple, yet powerfully positive effect that heeding the position of the 50-day simple moving average relative to the 200-day moving average can have on the returns of an intermediate term trader/investor.

I'll rehash the results below.  I thought it would also be interesting to analyze the historical performance of the S&P500 from the point of the Golden Cross to the next intermediate term peak.

Selling Stampede?

Tuesday's trading session marked the first time in a while where NYSE internals were >2:1 to the downside for the second consecutive session.  On Monday, NYSE declining issues outnumbered advancing issues almost 6:1 with down volume outpacing up volume 15:1.  Internals on Tuesday were 2.5:1 and 4.3:1 to the bad, respectively.  Typically, consecutive sessions such as the last 2 herald the beginning of a selling stampede.

ISTA- an emerging ophthalmic company with catalysts for growth

ISTA is a California-based company which has emerged over the past several years to become the fourth largest prescription ophthalmic (visual pathway) firm in the $5 billion U.S. market. The company currently has three products on the market- 1) Xibrom (twice daily)- for the treatment of inflammation after cataract surgery, 2) Istatol- for the treatment of glaucoma and 3) Vitrase- which is used as a spreading agent. Combined these three products accounted for $83 million in revenue in 2008 with $63 million from Xibrom, $15 million from Istatol and $5 million from Vitrase. The company is operating with significant although declining losses as the company has spent approximately $32 million on R&D in each of the past two years as they have been working on several new products in larger potential markets in the ophthalmology space. The most likely near-term product for the company is Bepreve, which is a treatment for ocular allergies, which has already been approved in the Japanese market (licensed by Senju). The market in the U.S. for ocular allergies is estimated to be over $600 million per year which could be a major catalyst for this $125 million market capitalization company looking forward. Bepreve has a scheduled PDUFA date in front of the FDA of 9/12/09 although they will first be meeting in front of an advisory committee on 6/26/09. Based on strong clinical results and the existence of the product in Japan without major safety issues the odds of an approval appear to be very high.

Russell 3000 now up 41% from lows

As of the close on 6/12 the Russell 3000 index has moved higher by 41% from its lows reached in March. The moves in several sectors have been staggering led by an 86% rise in the value of financials, a 57% climb in materials stocks and a 56% increase in industrials as many of the most beaten-down and lowest quality stocks have had the largest rise (which is very typical of large rebounds such as what has occurred in the past three months). Some sectors which have lagged during the rise in the three months include consumer staples, health care and telecom which have all climbed by less than 20%.

Since the beginning of June, the rally has been more subdued with a still very strong gain of 3%, however, leadership has completely changed as the strongest sectors have been utilities, technology and industrials which are all up by more than 5% while the weakest sectors continue to be health care, telecom and consumer staples. One of the key questions going forward is whether the significant underperformance of health care, telecom and staples in the current environment is a harbinger of more difficult times ahead or does it create an opportunity for investors. My philosophy is always to look at these types of questions on an individual stock basis, however, several macro themes explain much of the underperformance. Hopes of green shoots or a less bad economy have naturally led more defensive industries such as those which have underperformed with significant headwinds. The health care industry has also suffered by the potential future demise of the health care system as we currently know it-- I would expect only a few of the HMOs to remain in business in five years and those which do exist will have a completely different structure. Areas such as pharma and biotech may struggle with potential cost controls established by the government although I still think there are several good opportunities especially in the biotech and generics space. Within staples, if we see any type of correction in the market these will likely outperform once again as they may not be sexy but they are a generally safer part of the market. Im not seeing a whole lot of extremely cheap stocks within the staples sector but the relative valuation has greatly improved in the past three months to the rest of the market. For individual stock ideas, from myself as well as our team of highly experienced investors please take a look at the subscriber portion of the website.

What's to Be Done About Citigroup?

FDIC Chairwoman Sheila Bair has indicated last week that she is pushing to purge Citi’s top management, especially its CEO Vikram Pandit. It shows that the regulators in the government are losing patience with the snail's pace of “reform” at Citi.  In many of my previous posts at SeekingAlpha, and from day one of his appointment as CEO, I voiced strong disagreement and still think it is the single worst decision ever made by the Citi’s board.

Green shoots, Mustard Seeds, Crocii - or Liquidity-Driven Mirages?

The market continues to confound the bears. Not only is is climbing a wall of worry, it's ascending as it tramples the backs and steps on the heads of incredulous investment professionals. After all, has anyone  REALLY seen any verifiable shoots, seeds, or flowers? Anyone other than  Larry Kudlow that is. It was 2007, at the peak of credit-driven euphoria, when he expected Goldilocks to carry the stock market ever upwards, just before she became lunch for Papa Bear. I often wonder if the shoots and seeds that fuel Larry's persistent optimism reside under gro-lites in the back room of his basement.

Tracking the Bailouts

The Pew Charitable Trusts has created a very helpful website tracking and cataloging all the bailout activity.  Well worth a look.

Subsidyscope.com