I saw a report yesterday by James Paulson (PDF), a Wells Capital strategist, wherein he argues that stocks are cheaply priced at current levels for a number of reasons. I thought, given my last post speculating that we will see the S&P 500 at 666 again, it was only fair to present a counter-argument. It is a well-reasoned argument, once you get past his obsession with question marks and exclamation points!?!?!? He has six main points:
- The rally from March was just returning prices to October 2008 levels following an overreaction to economic conditions. The new bull market has yet to begin.
- When adjusted for inflation and the interest rate environment, stocks are at their lowest in terms of price/earnings since 1950, and in the lowest quartile going back to 1870.
- Extreme inventory and cost-cutting have made U.S. companies more potentially profitable (”profit leverage”) than in a long time.
- Rally despite “excessive and persistent doubt” about the market and economy suggest that there is not much downside to the market.
- There is truckloads of liquidity out there.
- Don’t fight the Fed — with the Fed using unprecedented powers, the market will not be allowed to fall.
I think this is the best thought-out “bull” argument I have seen. Paulson tempers his argument by saying that there will almost certainly be downtrends and corrections along the way, but now is as good a time as any for a long-term investor to enter the market.
My time to Speculate. I do not disagree with Paulson. In fact, there are a number of great buying opportunities at today’s levels from a value perspective. I recently picked up Dun & Bradstreet (DNB) (I will post on this this weekend), for example. Nevertheless, given the overall continuing economic decline, I believe that we will continue to see plenty of — better priced — buying opportunities for some time to come.
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