De Bulls are Back

As many of you who read our column would know, we would prefer a slow plod forward to this kind of feast or famine movement. But a good solid up week is always a good thing no matter how it comes, and as this is the second stab at the same levels for the equity indexes.

The chance of them sticking at these new levels are greater with each try. From the technicals, the markets all have good support at the year end close levels, and good valuation at these levels, thus from a technical analysis, the move upward is expected to sustain, the US markets we track were up on average 2.5 percent for the week ending January 27. And in Europe the FTSE 100, DAX and CAC jumped up on average 3.7 percent last week, the DAX jumping a stellar 5.3 percent in a very steady march upward. And Japan also, seemed to settle back to more reasoned valuation levels, gaining 4.6 percent on the last week.

Of particular note, the Canadian TSX increased 2.2 percent last week, a good week but not as high as others. However, we note that the index increase did not keep up with the earnings growth reported thus far.

The TSX recorded P/E ratio actually fell from 20.58 to 20.46 indicating improvement in value, even though the index went up the 2.2 percent P/E ratios do change from industry sector to industry sector, but on a historical basis, for an across the board index average, normal P/E ratios run in the 20 to 24 range. So 20.46 for the TSX and 19.3 for the DOW Jones Industrial Average are on the low side, indicating good value in the markets still. We estimate earnings increase year over year for the fourth quarter will come in at around 12 percent less than the recent years gone by, but still excellent from a longer term historical perspective.

Higher oil prices, based in geopolitical tension from problems in Nigeria and fear of what Iran is up to, kept pressure on the oil futures.

That said, the price for US light sweet did fall off slightly over the week, ending at US $67.40 off a little more than a dollar over the week. We don’t see OPEC cutting production in their meeting this week, so we expect little impact to the oil supply and demand equation, which remains tight. As an investor, the tightness in petroleum market coupled with the now accepted long term higher prices have opened the door to alternative forms of energy. We see nuclear energy, uranium mines, wind generation facilities, hydro and solar as forms of energy that will show substantial improvements

Gold has been moving up as well, now into the US $560 per ounce level. Our research shows a long term bull run for gold, reaching figures like US$ 650 in the next 12 months. Strategically, we see continued strength in oil and gold over the next few years, so plan accordingly.

In The United States:

Of course the big news this week will be the US Federal Open Market Committee meeting and their changes to the key overnight fed funds rate and of course, their comments on the state of the economy. But perhaps a better indicator out of the US this week, may be from the country’s major retailer, Wal-Mart.

The company reported that January same store sales are on track for a 4.7% increase over last year. That is up from recent months and underscores the general consensus that the 1.1% fourth quarter real GDP growth figure reported on Friday will prove aberrant. The US GDP growth figure was well below the 2.8% consensus estimate and came as a real surprise. Steady consumer spending, and pickups in abnormally weak business investment and government spending are expected to bring GDP growth back up near 4% in the first quarter. We also would not be surprised to see some revisions to the figure upwards and the data for the past quarter becomes more firm.

Looking at US corporations, and considering that new home sales are starting to slow (the major consumer item supporting the US economy over the past few years), the next level of home lifestyle interest may be in the form of home improvements. If you have been an investor in Home Depot (HD) you have no doubt looked back over that last year and half and wondered what exactly has happened? Unfortunately, the answer is not much, as the company’s shares are trading at the same level they were a year ago. The stock movement of course is disappointing after solid returns in 2003 and 2004.

However, please note that the company now has the world’s number one value investor, Warren Buffett as a shareholder and a five-year strategic plan for growth. So, where do you think the lifestyle improvement trend and Home Depot in particular are likely to go? With Buffet’s three-pronged plan of: first, enhancing the core-business, second, extending business and third expand into new markets, we see the company and the industry sector doing some healthy business over this coming year.

In The United Kingdom:

The UK stocks followed on the good earnings news but were also supported by improving figures. The economy expanded by 0.6% for the three-month period ended December 2005, compared with 0.4% in the previous quarter, according to the UK’s Office of National Statistics. This higher-than-expected figure was the result of a pick-up in services and consumer spending. In its latest report, the National Institute of Economic and Social Research forecast that the economic growth will accelerate to 2.3% in 2006, compared with 1.7% in 2005. This is good news.

Looking Ahead:

Good valuations and the solid growth figure of 12% year over year earnings growth on average, leave us confident in the economic expansion continuing and the need to be overweight into the equity markets. Commodities seem to have stabilised into either a steady growth rate and supply demand curve but remain a concern.

Financial Definition for the Week "The Consensus Estimate"

What is the consensus estimate, and where does the information come from to determine the figure. The consensus estimate is a figure based on the combined estimates of the analysts registered as following a public company. Generally, analysts give a consensus for a company’s earnings per share and revenue; these figures are most often made for the quarter, fiscal year and next fiscal year. The size of the company and the number of analysts covering it will dictate the size of the pool from which the estimate is derived.

When you hear that a company has "missed estimates" or "beaten estimates", these are references to consensus estimates. Based on projections, models, sentiments and research, analysts strive to come up with an estimate of what the company will do in the future.

Obviously, consensus estimates are not an exact science.

This leads some market pundits to believe that the market is not as efficient as often purported, and that the efficiency is driven by estimates about a multitude of future events that may not be accurate. This might help to explain why a company’s stock quickly adjusts to the new information provided by quarterly earnings and revenue numbers when these figures diverge from the consensus estimate.