Lange Financial Services has been a regular and exteremely valuable contributor to this site since its inception this year. Investors who have heeded their advice should be enjoying the Holiday Season extremely well this year. I am pleased to bring to the sites visitors the latest update from LFS, received this evening, on the markets and what they expect going forward. If you have been following the site and the previous posts, you will see how the comments in today’s letter summarizes their thoughts from 2010 and expands them through 2011. Happy Trading and Investing to all.
LANGE FINANCIAL SERVICES
December 19, 2010
During the past five-six months we have fully believed that the stock market would move significantly higher into the election and 2011. This optimism heavily reflected the benefits of GRIDLOCK off-setting or tempering the excessively expansive fiscal and economic policies of the Obama Administration, Congress, and their subordinates. These beliefs were the cornerstone of our bullish views on the equity markets. In brief, some of the positives that have emanated from GRIDLOCK were:
1. Extension of the Bush tax cuts for both consumers and business for two years. Further the estate tax rate was lowered to 35% with an individual exemption of $5 million and $10 million per couple.
2. Death of the proposed supplemental pork laden $1.3 trillion Democratic spending proposal.
3. A noticeable increase in consumer confidence as evidenced by sharply higher retail sales.
4. Business is now also showing signs of rising confidence with the sharply increased expectation of higher capital spending. Corporations have $2 trillion on their balance sheets. GDP projections are likely to be increased significantly beginning in the third quarter of 2010 and well into 2011. Growth in developing countries promises to be significant as we enter the New Year.
5. Reciprocally, there is less caution or a less negative attitude on the part of consumers and business.
6. Prospect that the enormous spending and excessiveness will be toned down significantly by the new Congress.
We continue to view the outlook for the equity markets into 2011 very positively. We are projecting earnings for the S&P 500 at a record $100 for 2011 and $110 for 2012. These estimates could prove low if economic conditions become even more favorable than we currently envisioned.
Reflecting rising consumer business and investor confidence, a market valuation of 16 times projected earnings seems realistic as optimism builds as we enter the New Year. If these levels are attained, record levels in the popular market indexes would be enjoyed i.e. above 14,000 in the DOW and 1550 in the S&P 500. This projected valuation would compare quite favorably with the 20 times or more valuations that prevailed in the 1990’s and in the past decade. According to BARRON’S the price/earnings ratio was 17 times as we entered 2005 when the S&P was also at 1200 rising to over 20 times in 2007.
Huge cash reserves are held currently by consumers and business. It is estimated that corporations hold $2 trillion in cash supported by huge borrowing potential. Consumers are believed to hold $8 trillion. Both liquidity factors strongly support the probability of a very favorable economic environment in the year[s] ahead. The pre-Presidential election year has historically been an up year. We are confident that the historic pattern will be enjoyed by investors in 2011. We continue to recommend an overweight position in equities.
Lange Financial Services