Monday, February 21, 2011

Further Gains Possible

The U.S. stock market has advanced sharply since September 15, 2010, the day we began publishing Growth Stock Insider.  Back then economists were engaged in a lively debate; one side arguing the country was headed into a double dip recession, the other saying it wouldn't be quite that bad.  The experts also predicted doomsday scenarios in Europe, slowdowns in China and Brazil, and an onslaught of tariffs and protectionist measures.  Equity analysts on Wall Street dialed back their earnings and sales estimates to reflect the "New Normal."  Then, people started to realize it wasn't the end of the world after all.  Business was moving along, despite what the computer models said.  Third quarter financial results came in ahead of consensus expectations.  Corporate executives couched their forecasts to acknowledge the academic concerns, and the negative reporting in the media.  But the guidance they issued was positive, often better than the market anticipated.  Interest rates remained low, moreover, and the Government picked up the pace of its money printing operation, pouring liquidity directly into the capital markets with its Quantitative Easing II program.  The supply and demand for stocks almost had to tilt to the bullish side as the Government removed existing securities from circulation and replaced them with hot money.

The Dow Jones Industrials are up 17%.  The S&P 500 has climbed 19%; the Nasdaq Composite, 23%; and the small cap Russell 2000 has led the way, advancing a remarkable 28%.  The Nasdaq and the Russell have regained everything they lost since the last market peak in 2007.  The big cap indexes still have a ways to go.  The stocks that we've presented in Growth Stock Insider have appreciated by an even greater amount.  Assuming an equal Dollar amount was invested in each security, the group's performance is up by almost 50%.  And our average holding period is more like three months than five, since we wrote up the stocks as we went along.

The stock market is in an uptrend and could keep rising for an extended period.  The interest rate and liquidity dynamics remain unusually positive.  Business fundamentals continue to be robust.  And while investor enthusiasm for equities has improved, skepticism still abounds.  Confidence in the future remains a scarce commodity.   And rightfully so, when you get right down to it.  Money printing and borrowing isn't a sustainable strategy.  The flow of funds inevitably will reverse course, exerting pressure on stock prices.  There are bound to be some downs along with the ups in the future.  It needn't be a disaster.  But when the big picture turns south the general market averages are bound to be affected.  That's why we focus on small fast growing Special Situations that can produce exceptional results under all kinds of economic conditions.  Our advice is to stay invested in a diversified portfolio of emerging growth companies and not worry about the general market.

Walter Ramsley
Executive Editor