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"Predictions are
risky", as Yogi
Berra said, "especially when they're about the future."
Investors were certain about something last
week: The American economy was either too weak or too strong.
They just couldn't decide which. Early in the week,
investors found the ISM manufacturing report encouraging,
and the Dow Jones Industrial Average rose. Then the Federal
Reserve's December 12, 2006, Open Market Committee (FOMC)
meeting notes were released. Members of the committee expressed
concern that the economy might be too weak and that inflation
might be too strong. The specter of stagflation drove markets
lower as investors seemed to forget that December's
meeting was based on the economic data available during December
and not more recent numbers. At the end of the week, the Labor
Department reported that employment for December was significantly
higher than analysts had expected. Also, average hourly earnings
increased, just as they had in November. Tight labor markets
and higher wages are inflation indicators, but they are lagging
indicators. That means they reflect what has already happened
in the economy. Regardless, markets mostly finished lower
for the week, driven primarily by investors' skittishness.
| Returns through 01/05/07 |
1-Week |
Y-T-D |
1-Year |
3-Year |
5-Year |
10-Year |
| Dow Jones Industrials |
-0.5 |
-0.5 |
13.3 |
5.5 |
4.0 |
6.6 |
| Nasdaq Composite |
0.8 |
0.8 |
5.58 |
5.9 |
3.6 |
6.4 |
| Standard & Poor's
500 |
-0.6 |
-0.6 |
9.67 |
4.9 |
3.9 |
6.5 |
Source: Yahoo! Finance, Barrons
Past performance is no guarantee of future results. Indices
are unmanaged and cannot be invested into directly.
Three-,
5-, and 10-year returns are annualized. Assumes dividends are
not reinvested.
SOME PEOPLE BELIEVE THAT A STOCK'S LONG-TERM performance
depends on its future earnings growth; the amount that its
earnings will increase in coming years. In other
words, if you could identify a company that would generate
10% earnings growth each year for the next 10 years, then
you could earn at least 10% each year, compounded. Wouldn't
that be great?
While earnings growth is important, stock
prices don't
necessarily move in tandem with increases or decreases in
company earnings. They are also affected by how much investors
think those earnings are worth. The price-to-earnings (P/E)
ratio of a company reflects the amount that investors are
willing to pay for one dollar of a company's earnings.
It is also called a stock's multiple. If a stock offers
an estimated $3 of earnings per share, and sells for $18,
then the stock's P/E or multiple is six (18 divided
by 3). At that point in time, investors are willing to pay
six times earnings to own that company's stock.
Multiples
compression and expansion
Sometimes a company's earnings will be strong, but its
share price doesn't increase. When this happens, a company's
multiple compresses or becomes smaller. For example, if earnings
increase to $6 and the stock's price stays at $18, then
the stock's new multiple is three times earnings, which
would indicate that investors think the company is worth significantly
less than it was when it had lower earnings. Multiples compression
may indicate that a company's growth prospects are
not as strong as they once were, or it may indicate that
the economy
is slowing down and investors are becoming more cautious.
Multiples may compress even when there is nothing fundamentally
wrong with the company.
Conversely, a stock may experience
a multiple expansion—a
significant increase in the amount that investors are willing
to pay for its future earnings. A multiple expansion doesn't
always indicate a stock has increased in value—it just
means that investors perceive that company to have greater
value. You may remember that, during the 1990s, some technology
stocks were trading at 100 or more times future earnings.
When they were not able to deliver earnings at levels anticipated
by investors, the bubble burst and many stocks' prices
fell significantly.
It's important to remember that investors' perceptions
play an important role in the rise and fall of markets.
 The
January Barometer, is a theory stating that the movement
of the S&P
500 during the month of January sets the stock market’s
direction for the year (as measured by the S&P 500).
In other words, if the S&P 500 was up at the end of January
compared to the beginning of the month, proponents would
expect the stock market to rise during the rest of the year.
According to the "Stock Traders Almanac", the January
Barometer has a pretty good track record:
"The January Barometer predicts the year's course with
a .750 batting average. Every down January on the S&P
since 1950, without exception, preceded a new or extended
bear market, or a flat market. The S&P gains during January's
first five days preceded full-year gains 85.7% of the time."
 A
five digit number is represented by ABCDE. If we add the
number 1 in front of ABCDE, then times 3, the result number
will be ABCDE appended by the number 1 (as shown in the figure).
What is this five digit number? Click here to view the answer.
Best Regards,
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