Friday, December 01, 2006

Stocks Lower into Final Hour on Economic Growth Concerns

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semi longs, Retail longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very negative as the advance/decline line is substantially lower, most sectors are falling and volume is above average. U.S. GDP growth came in at 1.1% and 0.7% during the first two quarters of 1995. The ISM Manufacturing Index fell below 50 during May 1995. It stayed below 50, reaching a low of 45.5, until August 1996. During that period, the S&P 500 soared 31% as the P/E multiple expanded from 16.0 to 17.2. This was well before the stock market bubble began to inflate. As well, manufacturing was more important to U.S. growth at this time. It only accounts for about 12% of growth now. Stocks can and will rise as P/E multiples expand, even with slowing growth and earnings. As I have said many times before, P/E multiple expansion is the near-record number of U.S. stock market shorts' worst nightmare. The S&P 500's forward P/E is still a very reasonable 15.8. I expect US stocks to trade higher into the close from current levels on short-covering, lower long-term rates and bargain-hunting.

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