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InvestWELL Report |
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January 5 , 2008
Dear Reader,
We would like to wish you and yours a very Happy and prosperous New Year.
Recently, the market has turned sharply down as a result of recession fears. It is not certain whether the recent downturn is just a mere correction or a longer term bear market.
Our next InvestWELL Report will be released on February 2, 2008.
(following the Labor Report which is generally recognized as a "market mover").
Derek Polcyn,
President
Investment
Idea
Quiz
Our Results
Market Highlights
Behavioral Finance Indicators
Answer to the Quiz
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Question:
What is the P/E (Price to Earnings) ratio and how useful is it?
Answer:
The P/E ratio is determined by dividing price by earnings per share for the past 12 months (or the last quarter).
The P/E ratio may be easy to calculate but it is actually quite difficult to interpret. It can be extremely informative in some situations, while at other times it is next to meaningless. After accounting for differences in measuring earnings, the P/E ratio could be an important yardstick of value when comparing companies which operate in similar industries.
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(Cumulative %)
Investment Strategy – MEMBER SECTION
InvestWELL Picks has increased its outperformance over the market (as defined by S&P 500 index. ) Over the last month, InvestWELL Picks has been relatively stable despite large volatility in the general market.
Chart 1.
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- During the last month, the US equity market suffered heavy losses as a result of the recession fears (Chart 2 & 3). Overall, the market remains really mixed. It appears there are many participants who are pessimistic about the market, an equal number who are optimistic, and not many who are in the middle.
Charts courtesy of StockCharts.com
- During the last month, the Canadian market did much better than its US counterpart, mostly as a result of strength in natural resources (Charts 2 & 3).
Charts courtesy of StockCharts.com
- Last month, the US economy gained only 18K new jobs while the unemployment level pushed up to 5% (from 4.7%), the highest level in 2 years. As a result, the media has begun spreading fears about the upcoming recession. Such rumors may be good for selling more advertising but are not a reflection of the true picture.
- Last month, the Canadian economy most likely added more jobs but the official statistics will be available next Friday (the Canadian Statistics are often published with delay but also with a greater level of accuracy).
- U.S. manufacturing unexpectedly contracted in December. The decline suggests that the overall economy may be weakening faster than some economists predicted. The figures are closely watched because a slowdown in factory production can translate to job cuts, which in turn reduces consumer spending - a major component of the economy.
- The US Treasury market had its best start to a year since 2001 after U.S. unemployment rose to the highest rate in more than two years and manufacturing expectedly contracted. The yields fell steeply amid increasing speculation that the Federal Reserve will cut borrowing costs by more than was forecasted to prevent a recession.
- The officials from OPEC, the producer of more than 40 percent of the world's oil, stated "OPEC is supplying the international market with enough crude oil and can't be blamed for the record prices". OPEC believes that the culprits for higher prices include: the problems in Nigeria and Pakistan, and the credit crisis caused by the U.S. subprime- mortgage market.
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(see
explanation)
Here is a direct quote from the Behavioral Section in last month's Member newsletter:
"Overall, we believe the market has found a support that should hold for the next few weeks. We are neutral with a slightly bullish bias"
It turns out we were more wrong than right this time. The market has found some support but it declined in comparison to the level during the writing of the newsletter last month. It is OK for us to admit that we were wrong since no one can be right all the time.
Charts 6 - 8: Advancing/Declining Line, AAII and Equity Put/Call Ratio
Charts courtesy of StockCharts.com
and DecisionPoint.com
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A is correct.
Companies often measure earnings differently, subject to various accounting regimes. The P/E ratio could be, however, used for determining the valuation of a company vis-à-vis another company in a similar industry.
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Thank you for reading InvestWELL Report. This is a non-member version of InvestWELL Report.
Please sign up for our membership to receive the member version of the InvestWELL Report.
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