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To: RealMuLan who wrote (1483)	8/20/2006 5:09:28 PM
From: RealMuLan	Respond to of 2852

Five questions on the market After examining reams of data, Standard & Poor's strategist looks ahead sun-sentinel.com Published August 20, 2006 It's been a tough summer on Wall Street. The major stock market indexes have been flat or down since May. Longer term, the Dow Jones industrial average has risen just under 5 percent so far this year, while the Standard & Poor's 500 hasn't quite gained 3 percent and the Nasdaq is down 3.6 percent. Investors seem to have a touch of fright, and who wouldn't? With energy prices sky-high, inflation coming back into the picture, and the recently renewed threat of terrorism, uncertainty is a reasonable reaction. Sam Stovall, the chief investment strategist for Standard & Poor's, looks to market history for guidance. Stovall is the analyst who communicates S&P's outlook on markets. He draws on vast reams of information from S&P, a leading provider of credit ratings, stock market indexes, financial research and analysis. The company is a division of The McGraw-Hill Cos. Inc. I recently asked Stovall about today's markets Q: Tell me, why did the stock market barely notice the arrest of two dozen suspected terrorists who wanted to blow up airliners? A: This was a thwarted plot, not an actual event. If this had actually occurred and several planes blew up midair over the Atlantic Ocean, stocks would be in a tailspin right now. And it would throw the consumers into a tailspin. What happens when there's an event like Sept. 11, 2001, is the market is bumped off its trend, and then it responds and gets back to its trend. Here's what markets have done following past terrorism shocks. Four weeks following Sept. 11, the Standard & Poor's 500 was even with where it was before the attack. After the Bali bombing in October 2002, the S&P 500 was up 9 percent a month afterward. After the Madrid train bombing in March 2004, the market was down 2 percent and after the London subway bombing in July 2005, the market was up 3 percent a month later. In 2001, we were coming out of a recession. Now, we're in a period of decelerating economic growth. You could say this time it is different, because it is. We are not in an upward trend. Q: So we can't expect that pattern to hold. Is there ever one shock too many? This summer, with rockets flying in the Middle East, oil prices out of sight and now the renewed threat of terrorism, is it too much? A: There's a trio of trepidation. Energy, inflation and its effect on interest rates and the resulting slowdown in corporate earnings. Energy is stubbornly high. We think the price of a barrel of oil will average close to $72 this year. [It closed Friday at $71.10.] I think people are underestimating the threat of inflation. They are overestimating the underlying strength of the U.S. economy. They are underestimating the threat of a recession. Q: What do you expect in the short term? A: You know what this market needs? A good, old-fashioned correction, a decline of 10 percent or more. In 35 years, the average bull market has experienced a decline of 14 percent ? at some time ? usually within the first two years. But in this bull market, we have not had one. [A bull market is a period of generally rising stock prices.] The current bull market began in early 2003. My feeling is it is long overdue. So why is it only going to be a correction and not a new bear market? [A bear market is a period of falling stock prices that lasts for months or years.] Because there's an awful lot of cash out there that could solve the market's problems. There is $635 billion of cash on the books of nonfinancial companies within the S&P 500 that is aching to find a place to go. It will probably go into the area of acquisitions, or share buybacks or dividend increases or organic reinvestment in the companies themselves. Q: The market's been on a downward tear since May, so maybe you're seeing that already? A: And beyond the end of this year there are things to be concerned about. Our economist says there's a 35 percent chance that we could be in a recession in 2007. That all depends on whether the Fed went too far. When the Fed stops raising rates, it usually has gone too far. [But it reverses course quickly, Stovall's research shows.] On average, since 1970, the Fed begins to lower rates five and a half months after it stopped raising them. And the only good thing to be said is that stocks on average return 9.8 percent in the six months after the Fed starts lowering them. You get one year's return in six months. Q: How can an investor protect a portfolio now? A: To play defense, you pick those sectors that do fairly well [in difficult times] such as consumer staples. We also still like energy, financials and telecom. I don't think investors want to take risks now. They are moving toward value stocks and away from small company stocks to large capitalization stocks, as well. Harriet Johnson Brackey can be reached at hjbrackey@sun-sentinel.com or 954-356-4614.

To: RealMuLan who wrote (1483)	8/20/2006 5:12:05 PM
From: RealMuLan	Read Replies (2) \| Respond to of 2852

Bulling Through the Bear Brigade P-E Ratios Show Attractive Buys Are Out There, Despite Widespread Pessimism washingtonpost.com By Chet Currier Bloomberg News Sunday, August 20, 2006; Page F04 Gloom is busting out all over. War, terrorist plots, high gasoline prices and talk of a housing-led recession all feed into a dismal mood in U.S. public opinion forums, including the polls and the financial markets. According to the latest Bloomberg News-Los Angeles Times poll, a great preponderance of the U.S. populace thinks the country is going in the wrong direction. "We are heading for a major contraction," a reader e-mails me. Neither the stock market nor the bond market offers much to get enthusiastic about. Well past the halfway point of 2006, the 9,000-plus stock and bond mutual funds tracked by Bloomberg showed an average year-to-date return of 2.3 percent as of the end of last week. Stock funds are up 2.3 percent, bond funds 2.2 percent. Vanguard Group reports that its four taxable money-market funds returned 2.6 percent to 2.8 percent from Jan. 1 to mid-August. It's an asset allocator's nightmare, with each of the major classes of investments producing the same dreary result. A lone consoling thought presents itself: These mood swings often go to unwarranted extremes. Although the future can never be known for certain, this rampant pessimism may have created better buying opportunities in stocks than would have existed otherwise. "It seems to me the alarmists are a bit too hysterical and ideological," wrote Edward Yardeni, chief investment strategist at fund management company Oak Associates Ltd., in a recent commentary. "They almost seem to be rooting for a recession." In any good two-sides-of-the-story market, there is always a constituency for a decline in prices. Its most obvious members would be short-sellers, who have sold in hopes of buying back later at lower prices. It also includes those who have lightened up their long positions and accumulated cash reserves, holding out for better prices at which to buy. This bear brigade has been enlarged by the rise of hedge funds, which at an estimated $1.2 trillion in total assets have more than doubled in size in the past five years. While hedge funds pursue all sorts of investment strategies, in the aggregate they are much more inclined to play the short side of markets than, say, conventional mutual funds. No question about it, shorts can be a disruptive force at times. But long-term investors might welcome their presence, rather than deplore it. If everybody's a bull, no buyer is ever going to get a bargain. One simple gauge of sentiment in the stock market is the price-to-earnings ratio, which displays in a single number how much investors are willing to pay per dollar of current earning power. The P-E multiple of the Standard & Poor's 500-stock index has been cut in half in the past four years, from almost 35 to less than 17. According to my Bloomberg data, the P-E ratio of a leading international yardstick, the Morgan Stanley Capital International EAFE Index, is even lower, at 15 times the most recent 12 months' earnings. For the MSCI emerging markets index, the P-E has lately hovered around 13. Plainly, one number can never tell the whole story. But anytime I'm thinking about buying stocks, I'll naturally prefer to pay less per unit of earnings rather than more. Over the past 36 years, says Milton Ezrati, senior economic strategist at mutual fund management company Lord Abbett & Co., you could have done pretty well buying foreign stocks when their P-Es were lower than those of U.S. equities, and emphasizing U.S. shares when the domestic market offered the lower P-Es. "Foreign stocks outperformed American stocks when P-E multiples abroad were lower," Ezrati says. "When in the late 1980s foreign multiples began to rise relative to those in the United States, the relative performance of foreign markets began to peak. The relative underperformance of foreign stocks only began to stabilize after 2000, when the relative attractiveness of foreign multiples reemerged." Using this kind of "simplistic gauge," Ezrati acknowledges, no one should expect it to track "every wiggle in relative market movements." But the patterns do support a basic contrarian point: There's an enduring case to be made for thinking about buying stocks wherever and whenever pessimism prevails. Chet Currier is a Bloomberg News columnist.