Waiting for the All Clear Signal

Transcription

1 Waiting for the All Clear Signal Aberdeen Investment Management, LLC A Guide Service for Micro-Cap Technology Investment April 18, 2012 Jeb B. Terry, Sr. President jbtsr@aberdeeninvestment.com Caution: It s a risky world we live in. My opinions are based on information believed to be reliable but hey, I could be wrong. When investing, try to use good judgment and don't hesitate to seek professional assistance. Remember to set limits and have a plan... Good Luck! Page 1 of 41

2 ALL CLEAR? In the long run... it s remarkably good People... Employment picking up. We remain in a sweet spot Productivity... Profits are strong and will get even stronger Capital... We are awash in liquidity, under loaned & under invested Consumers have the capacity to spend and invest Stocks are cheap Interest rates and high frequency data signal sustainable recovery Housing will be a wind at our backs There is a Mobile Revolution going on Big government is the biggest risk Page 2 of 41

3 Future returns in equities... are as good as they have been in a generation Goldman Sachs Mar. 21, 2012 S&P 500 PRICE HISTORY: 1926 TO PRESENT 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% -50% -100% 10 Year % Change 10 year % Change - Linear Regression 369% 313% 272% 87% 29% 34% 57% 88% 38% -25% -58% -38% Reversion to the mean is in progress... Page 3 of 41

4 Thousands PEOPLE, PRODUCTIVITY AND CAPITAL Employment is rising from trough conditions best phase of labor cycle to invest. 160, , , , , , ,000 90,000 80,000 70,000 60,000 PERSPECTIVES ON U.S. EMPLOYMENT METRICS 1959 to Present 63,684 Persons Employed (000's) Linear (Persons Employed (000's)) 146, , , ,960 Source: Bureau of Labor Statistics, Household Survey Page 4 of 41

5 Don t be misled by March employment numbers - the trend is up. 3 month gain is best since 2000 and 1990 before then. 2,000 1,500 1, (500) (1,000) (1,500) (2,000) (2,500) (3,000) Change in Number of New Jobs Since 1980 Quarterly Change in Employed Qtrly Change in # Employed Median Qtrly Change in # Employed Since per. Mov. Avg. (Qtrly Change in # Employed) 1, Page 5 of 41

6 Survey data points to more job growth ISM Employment Index: Manufacturing v. Non- Manufacturing 1997-Present Monthly Mfg Employment Monthly Non-Mfg Employment Expansion Contraction 25 Page 6 of 41

7 U.S. has best labor force demographics on the planet Page 7 of 41

8 MILLIONS OF PEOPLE Still in a sweet spot of rising workers, plenty of spenders and declining dependents NUMBER OF PEOPLE REACHING AGE 49 VERSUS AGE 18 AND TO YR OLDS 18 YR OLDS 25 YR OLDS Source:Cenus Bureau Page 8 of 41

9 Millions of People The most productive and economically engaged people in recorded economic history. We are the best educated, best informed and most investment literate population in history. GROWTH IN THE INVESTING PUBLIC U.S. POPULATION AGE 45 TO Source: US Census and Aberdeen Invesment estimates There is a growing urgency for the population to earn a better return on investment. Page 9 of 41

10 % of Nominal GDP PEOPLE, PRODUCTIVITY AND CAPITAL Corporate Profits as % of Nominal GDP 1972 to Present (Seasonally Adj. Annual rates per NIPA) 14% 13% 12% 11% 10% 9% 8% 7% 6% Linear (Corp Profit/Nominal GDP) Profits LEAD GDP and stock market value. 10.8% 12.3% 10.0% 8.6% 8.3% 7.3% 7.4% 7.1% 6.8% 6.9% 13.0% Source: Bureau of Eco Analysis. National Income and Product Accounts. Profits will compress as a % as more is spent on labor and capacity expansion. Markets won t peak for 1 to 2 years from the top Page 10 of 41

11 Digits vs. Widgets Why profits are trending higher... Apple vs. Exxon APPLE EXXON ($millions) Market Cap $ 564,300 $ 390, Revenue $ 160,470 $ 502, Revenue Growth 48% 3% Operating Margin 35% 12% Fixed Asset Turn Cash, Net of LT Debt $ 97,601 $ 3, EPS Growth Rate 60% 0% 2012 P/E Multiple Page 11 of 41

12 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $- S&P 500 Quarterly Operating EPS 1988 to Present and Projected to Dec Qtrly Operating Earnings Projected Qtrly Operating Earnings Linear Regression of Earnings Current LTM P/E Ratio of 13.89X P/E Ratio of 16.4X at June 2007 P/E Ratio of 20.3X at December 2003 $14.88 $31.41 $23.73 SPX would be 1600, up 17%, if it were to trade at the June 2007 P/E. SPX would be , up 45%, if it were to trade at the Dec 2003 P/E when earnings were at a similar point of recovering above the prior high. Page 12 of 41

13 1971 = 100 Stock prices might be lower than in 2000 but earnings have been rising strongly. Earnings are up 76% since 2000 while the SPX is down. 1,801 1,601 1,401 S&P 500 Earnings vs Price Relative Change Since 1971 LTM S&P 500 EPS 1971=100 S&P 500 Price 1971=100 1, , , , ,201 1, Source: Bureau of Eco Analysis. National Income and Product Accounts. Page 13 of 41

14 $Billions PEOPLE, PRODUCTIVITY AND CAPITAL $2,500 $2,000 $1,500 STILL HOARDING CASH M1 SINCE 1970 Mar-12 Sept/Oct 2008 Financial Melt Down Terrorist Attack $1, Debt Ceiling /Downgrade/Euro Crisis $1,209 $2,240 $1,632 $1,000 $500 $208 $390 $780 $- Source: Federal Reserve, Not seasonally adjusted Awash in liquidity. Over $200 billion went into cash in 2 weeks following the July speech by Obama. This compares to $160 billion inflow following the Lehman bankruptcy in Sept Page 14 of 41

15 Banks are starting to make loans. Page 15 of 41

16 Velocity - Loans/M2 But velocity remains at recession low levels. BANK C&I and REAL ESTATE LOANS vs. M2 VELOCITY SINCE Peak Sep Real Estate Loans take off June Source: Federal Reserve, seasonally adjusted Over $500 billion in unutilized lending capacity. Plenty of capacity to fund growth in the economy. Page 16 of 41

17 Nominal GDP Y-O-Y % Change We have not seen velocity as low as now in any of our adult lives. CHANGE M2 VELOCITY vs CHANGE IN NOMINAL GDP 1971 to Present Nominal GDP / M2 (1) 1.40 (3) 1.30 (5) 1.20 Source: Bloomberg, Federal Reserve Nominal GDP would be 17% higher if M2 velocity returned to the avg of 1.82x since Page 17 of 41

18 NIPA Corp. Profit Y-O-Y % Change The hoarding of cash has temporarily stunted profit growth. We are at a turning point. Look for profit acceleration once M2 growth starts to slow and people convert cash into goods. CHANGE IN M2 vs CHANGE IN CORPORATE PROFITS (All Corporate Profits per NIPA) 1971 to Present 50% 42% 34% 26% 18% 10% 2% -6% -14% -22% -30% When M2 growth slows, profit growth picks up. -6.0% -2.0% 2.0% 6.0% 10.0% 14.0% 18.0% Y-O-Y % Change M2 - Inverted Source: Federal Reserve, BEA - National Income and Products Accounts Page 18 of 41

19 $ Billions Return free risk... there is over $3 trillion more MZM than is traditionally held in cash and near cash investments. $16,000 U.S. Nominal GDP vs. Money of Zero Maturity 1990 to Present MZM % of GDP MZM Nominal GDP Median MZM % of GDP $15, % $14, % $12,000 $10,000 $9,520 $10, % $8,000 $6,000 $4,000 $2,000 $4, % 58.6% 90.0% 69.0% 70.7% 60.0% 41.7% 30.0% $0 0.0% Sources: St. Louis Fed, Dallas Fed MZM (net of T-bills) is 106% of all publicly traded treasury debt. It was only 84% in Page 19 of 41

20 $ Billions A perfect contrarian set up. Retail money has fled equities in unprecedented amounts since $500 $400 $300 $200 $100 Equity vs. Bond Mutual Fund Net New Cash Flow 1990 to Feb Unprecedented move into retail equity funds Equity $309 $140.3 Bond Unprecedented move into retail bond funds $375.0 $244.8 $119.1 $62.1 $0 -$100 -$200 -$300 -$28 -$64.6 -$49.8 Unprecedented move out of retail equity funds -$238 -$24 -$128 Source: ICI, Sifma.org 11 consecutive monthly outflows from equity mutual funds as of Mar 2012 of a cumulative $121.4 Billion. Equity inflows have a gearing impact on market value of as high as 10X or more. Page 20 of 41

21 % Change in NASDAQ The history is clear. When cash leaves money market funds stock values go up (20) (40) (60) (80) CHANGE IN NASDAQ vs CHANGE IN MONEY MARKET ACCOUNTS 1987 to Present Y-O-Y % Change in Money Markets Acct Balances (Inverted) Y-O-Y % Change in NASDAQ (4 QTR avg) Money market fund inflows slow or contract => Stock prices usually expand (60) (48) (36) (24) (12) Money Market Funds Y-O-Y % Change Source: Bloomberg, Federal Reserve Page 21 of 41

22 Months - M2 CONSUMERS CAN SPEND AND INVEST They have nearly 11 months of personal consumption expenditure sitting in cash! Rebuilding Liquidity: Months of PCE Held as Cash, Savings Dep & Retail Money Market Funds 1980 to Mar M2 includes a broader set of financial assets held principally by households. M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) smalldenomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds (MMMFs). Page 22 of 41

23 They have the most income versus debt service in 20 years. Rebuilding Liquidity: Debt Service as % of DPI 1990 to Present 14.50% 14.00% 13.50% 13.00% 12.50% 12.00% 11.50% 11.00% 10.50% 10.00% 11.99% 10.86% 12.7% 13.84% Consumer debt service as a % of Disposable Personal Income is in the best shape since % Source: Bureau of Eco. Analysis, Federal Reserve Page 23 of 41

24 $ Billions Few would guess retirement funds and retail cash assets are at record high levels. Rebuilt Nest Egg: Retirement Accounts & Cash vs. Market Value of S&P to Present Retirement & M1 & Retail Money Market Funds Mkt Value of S&P 500 $25,000 $20,000 $20,211 $20,780 $15,000 $10,000 $5,000 $4,822 $12,385 $- $2,367 SPX averaged 67% of retirement assets and money market accounts since It is 59.6% today. The SPX would be 12.5% higher if it were to return to the average. Page 24 of 41

25 STOCKS ARE CHEAP LTM P/E Ratio S&P to Present Median P/E Ratio 1926 Median P/E Ratio Since Year Moving Average The P/E ratio is not at a level characteristic of a top. Page 25 of 41

26 P/E Ratio Bond prices are bubblelicious. Paying an effective P/E of 50X for 10 year Treasuries borders on insanity S&P 500 FTM Operating Earnings P/E Ratio vs. The "P/E Ratio" of the 10 Year Treasury 1988 to Present S&P 500 FTM Oper. Earnings P/E Ratio Year Treasury P/E Yr Treas. P/E Ratio The peak P/E for stocks was only 34X in Page 26 of 41

27 Wide earnings spread = rising stock market. 19% 14% 9% S&P 500 Earnings Yield vs 10 Year US Treasury 1970 to Present Earnings Yld - 10 Treas Spread 10 Yr US Treas.Yield S&P 500 Earnings Yield Not since the 1970's have we seen the earnings yield spread over the 10 year US Treasury as wide as today. 2.00% 7.2% 24.00% 20.00% 16.00% 12.00% 4% -1% -6% 6.30% 4.67% 3.24% 8.00% 5.20% 4.00% 0.00% -4.00% % Spread The S&P 500 gained an average of 13% per year from 1975 to Since 1970 the market has been up 83% of the time following a quarter where the earnings spread was 4.5% or better. Page 27 of 41

28 S&P 500 The S&P 500 is incredibly undervalued relative to interest rates and earnings growth. A flipside to the overvalued tops going into the 1987 crash and the 2000 tech crash. 5,500 4,500 3,500 2,500 1, (500) (1,500) S&P 500 Actual Price vs. Cap Rate Value % Over Valued % Under Valued S&P 500 Actual Cap Rate Fair Value 1987 market crash 72% 2000 tech crash 4,937 79% 1, % -59.1% 280% 240% 200% 160% 120% 80% 40% 0% -40% -80% -72.2% % Over / Under Valued Page 28 of 41

29 % of Nominal GDP The SPX market cap should be closer to 100% of the nominal GDP if it were to be on trend. 140% S&P 500 Market Cap as % of Nominal GDP Since 1988 Linear (S&P 500 MV % of Nominal GDP) 131% 120% 100% 80% 96% 81% 60% 70% 40% 50% 20% 0% That implies the SPX should be 24% higher than today. Page 29 of 41

30 % Interest Rate INTEREST RATES AND HIGH FREQUENCY DATA SIGNAL CONTINUING RECOVERY The yield curve is STEEP... It is 1.6X steeper than average The Yield Curve 10 YEAR U.S. TREAS NOTE vs. FED FUNDS RATE 1980 to Present Yield Curve Histogram 10 Yr Treas rate FED FUNDS RATE (5.0) (10.0) Yield Curve Histogram Source: Federal Reserve The economy has grown and equity markets have had prolonged bull phases every time the curve has been this steep. Page 30 of 41

31 The weekly leading economic indicators are turning up. They are nowhere near economic peak conditions ECRI Weekly Leading Economic Indicators 1988 to Present Page 31 of 41

32 The Institute of Supply Managers surveys continue to signal businesses are growing. (scores over 50 signal expansion) ISM Business Activity Index: Manufacturing v. Non-Manufacturing 1997-Present Monthly Mfg Activity Index Monthly Non-Mfg Business Activity Index Page 32 of 41

33 HOUSING WILL BE A WIND AT OUR BACKS Page 33 of 41

34 Permits - Thousands Job growth leads growth in permits. Recent job growth signals a potential for a sharp improvement in housing permits Monthly Housing Permits vs New Jobs 1959 to Present 12 per. Mov. Avg. (Total Housing Permits) 12 per. Mov. Avg. (YOY Change in # Employed) 8,000 6,000 4,000 2,000 - (2,000) (4,000) (6,000) (8,000) (10,000) Persons - Thousands Permits could more than double if they return to the historical relation to job growth. Page 34 of 41

35 US Housing Affordability Index Best Time On Record to Buy a House! Source: Natl. Assoc. of Realtors Page 35 of 41

36 Consumer confidence is rising Rasmussen Consumer Index As of April 16, Source: Rasmussen Reports Page 36 of 41

37 HANG ON TO YOUR HATS THE MOBILE REVOLUTION HAS MUCH MORE TO GO Global Data Traffic Growth: Fixed Internet vs. Mobile Internet Global Fixed Line Internet Traffic Global Mobile Internet Traffic , , ,419.8 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Source: Cisco VNI Mobile 2012 Déjà vu all over again... similar growth trajectory as late 90 s. We are in year 3 of a multi-year boom. Page 37 of 41

38 Page 38 of 41

39 More smart devices will accelerate commerce, stimulate productivity and disrupt legacy content monetization business models. Page 39 of 41

40 The smartphone has condensed the capabilities and functionalities of a myriad of consumer electronic devices at a fraction of the cost. Page 40 of 41

41 IT S ALL CLEAR... LET S HIT IT! Patient buying of growth stocks is needed to invigorate investor returns. Aberdeen focuses on young micro-cap tech stocks and is very much engaged in the mobile revolution. Page 41 of 41