October 18, 2013

VALUATION WARNING: Our models find that overvaluation is at levels typically seen when market pullbacks occur. Overvalued stocks now make up 77.72% of our stocks assigned a valuation and 44.61% of those equities are calculated to be overvalued by 20% or more.  15 of 16 sectors are calculated to be overvalued--14 of them by double digits.

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  This week's free download is for Google (GOOG). Google Inc. is a technology company that provides a web based search engine through its website. The Company offers a wide range of search options, including web, image, groups, directory, and news searches. It serves corporate clients, including advertisers, content publishers and site managers with cost-effective advertising and a wide range of revenue generating search services. Google Inc. is headquartered in Mountain View, California.

  ValuEngine continues its HOLD recommendation on GOOGLE INC-CL A for 2013-10-17. Based on the information we have gathered and our resulting research, we feel that GOOGLE INC-CL A has the probability to ROUGHLY MATCH average market performance for the next year. The company exhibits ATTRACTIVE Company Size but UNATTRACTIVE Price Sales Ratio.

Read our Complete Detailed Valuation Report on Google HERE.

Sector Talk--Basic Materials

  Below, we present the latest data on Basic Materials stocks from our Institutional software package (VEI).    Top five lists are provided for each category.  We applied some basic liquidity criteria--share price greater than $3 and average daily volume in excess of 100k shares. 

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Top-Five Basic Materials Stocks--Short-Term Forecast Returns

Top-Five Basic Materials Stocks--Long-Term Forecast Returns

Top-Five Basic Materials Stocks--Composite Score

Top-Five Basic Materials Stocks--Most Overvalued

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What's Hot-- US Government Shutdown has Limited Effect on Market

  Direct economic effects attributed to the shutdown are relatively minor. As IMF Monetary and Capital Markets Department Assistant Director Laura Kodres recently noted, "the shutdown so far has been fairly benign. The effects on the markets have been relatively low."

  As is typical, markets had already priced in the potential shutdown. So, fluctuations in equities have been within recent norms. However, the IMF's Kodres also cautioned that the shenanigans in Washington DC could have a negative impact on the US economy if they lead to greater uncertainty. "Any time we have an increase in uncertainty, that can have an effect on demand and potentially the supply of credit.”

  Economists who have tried to quantify the effect of a short-term government shutdown have predicted only minor effects on the US economy. Typically, their estimates indicate that growth would only suffer a decline of a few tenths of a percent for the fourth quarter. These low estimates are predicated on a shutdown similar to those which have occurred in the past. The typical US shutdown has only endured for a few days to a few weeks and their effects were largely benign for investors. For the most recent US government shutdown during the Clinton Administration--and there were actually two periods where the government was “shutdown,” November 13-19, 1995 and December 6, 1995-January 6, 1996, the total duration was 27 days.

  The effect of the Clinton-era shutdown on the stock market was minor. But the mid-90s economy featured a much lower overall unemployment rate as the US was benefiting from the post-Cold War “peace dividend” and a technology boom which would culminate in a roaring stock market only brought to heel by the bursting of the tech bubble.

  If we consider the market effects of all of the US government shutdowns dating back to the Carter Administration—17 in all, we find that in almost every case the market may have suffered a temporary setback, but went on to post positive gains within a few weeks or months—shutdowns during the Carter Administration are the exception to this rule due the additional economic issues of that era (inflation, high unemployment, oil shocks, etc.) For all US government shutdowns since 1981—eleven total, within 30 days the market was higher than pre-shutdown levels on nine occasions.

  Thus we find that the overall economic picture combined with the historical lessons of past shutdowns should be bullish for stocks. Current debt levels are a drag on growth to be sure, but they do not threaten the short-term economic growth of the US economy. Despite the economic crisis of 2007-2008--and the resultant surge in debt necessitated by the various bailouts and stimulus programs, inflation remains low and is predicted to remain at @1.86%/year for the next decade according to the Federal Reserve Bank of Cleveland's latest survey of economists and market measures. Because the world still believes in the “full faith and credit” of the US government, current interest rates remain at 40-year lows.

  The generally positive market, interest-rate, and overall economic environment makes it all the more disappointing that politicians in Washington DC are playing such a dangerous game. Their continued failure to cut a budget deal is putting the global economic leadership of the US at risk. Nobody can know for sure what would happen to the global economy if the U.S. were to miss an interest payment or miss a payoff on a maturing note or bond. Rates on short-term Treasuries spiked 0.06% last week as nervous investors considered the possibility of a default. In addition, the cost of credit default swaps on US debt almost doubled.

  Since 1960, Congress has raised this limit 78 times without much controversy and over the course of that half century not a single Social Security check has been missed, nor has a senior citizen lost their medicare. No default has ever occurred. However, in 2011, a delay in raising the debt ceiling caused a rating agency to downgrade the U.S. debt for the first time ever --and subsequently cost the US billions in increased borrowing costs. In 1979, a Treasury Department paperwork “glitch” related to a last minute debt-ceiling increase resulted in an interest rate increase of 0.6% and also cost taxpayers billions of dollars.

  We have seen sideways trading in treasuries, but fortunately the equity markets have been relatively stable. The stock market continues to benefit from the Federal Reserve's policy of “quantitative easing” with resultant 0% to 0.25% federal-funds rate. If confirmed, new Fed Chief nominee Janet Yellen will most likely continue this policy over the next year. Yellen also has re-emphasized the Fed's employment mandate, and one would expect some further assistance to the labor market—which would increase government revenues and provide the final piece of the puzzle needed for a full US economic recovery.

   We remain convinced that the US economy has weathered the Great Recession of 2008 and overcome the lion's share of issues related to the financial system and the housing market. While the labor market remains a concern, we have confidence in the new Fed Chair nominee's experience and judgment and believe that she will continue policies which have been of great benefit to the equity markets. The potential for a “relief rally” is significant and investors could benefit--just as they did after a majority of the shutdowns since 1981.

ValuEngine View Continues to Dominate S&P 500

 For September/October, the stock market was on a debt-crisis roller coaster which finally broke to the upside once the politicians in
Washington DC came to their senses. Our portfolio however, turned in another winning performance. The ValuEngine View posted a gain of 6.56% vs. the S&P 500 gain of 2.09%. That's a beat of 447 bps. The trailing 12 month gain of the VE View is 49.76% versus the S&P 500 return of 19.04%. The return since inception of the View is 85.63% versus the S&P's gain of 53.04%.

  Nine of our fifteen picks were winners with impressive double-digit gains posted by US Silica, Sunpower, Changyou, CTC Media, Icahn
Enterprises, and Scorpio Tankers. Sunpower and US Silica have been on a tear the past few months for the View. However, our portfolio was held back by the losses posted by Cooper Tire and Popular Inc.

  Thank goodness the “adults” in Washington DC held sway and the shutdown and potential debt default shenanigans of the Tea Party faction of Congress was put to rest—for now. The markets jumped up in relief on several occasions during the past month and we believe that if the US economy can avoid these sorts of self-inflicted wounds moving forward and get the labor situation improved, the recovery will finally take off.

Here are the results for September-October 2013: