Waiting for Santa Claus

10/24/2011 11:35 am EST

Focus: MARKETS

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

While earnings remain excellent, investors need to know that the markets usually don’t firm up until the holiday season, says Louis Navellier of Emerging Growth.

Louis, earnings look pretty good. What do you think?

We’re at a record high for earnings. We’re at record-low P/E ratios and no one is talking about it.

Why?

Well, going into the second-quarter earnings season, the analysts were too cautious and they were trimming, so we just had bigger surprises than normal.

So we lowered our expectations.

Correct. And the earnings are clearly being fueled by a rise in the middle class in Latin America and Asia and India. That growing middle class consumes a lot of our goods and they eat a lot. I mean, it’s all kinds of areas that we can go to.

And they’re not Europe.

Correct. And they’re younger economies. A younger economy with better demographics has more household formation and more organic growth. So that’s definitely fueling earnings, and the global GDP is better than it is in the United States or Europe.

And then the other thing that’s fueling it is the weak dollar. If you’re a multinational and you get paid in Brazilian real or South Korean won or Australian dollars or Chilean pesos, it becomes like manna from heaven, because you’re just reaping these windfall profits on these appreciating currencies. So that’s helping companies.

The final thing that’s helping them is the stock buybacks. Corporate America was raising $20 billion a week in new corporate bond debt. Some weeks they pushed $60 billion. So we’ve gone from a $1 trillion a year pace to a $3 trillion a year pace.

And a lot of that money they raised at 2% and 3%, they just buy their stock back. I had Caterpillar (CAT) raise a bunch of money in China at 1 3/8%, okay.

Wow.

So they raise this money all over the world. And you know, sometimes they take the money to buy their competitors, but a lot of it is going back to buybacks.

That’s Finance 101 in the colleges: do I finance my business through bonds or stocks and as the P/E ratios get lower and lower, you’re going to do more borrowing on the bottom of the market to buy your stock back.

If P/E ratios get higher and higher, you’ll do less of that. But I think most corporate insiders know that, and CFOs know their stocks are grossly undervalued to where they’ve been historically.

Mmhmm. Too late for individual investors who aren’t totally paralyzed with fear to get in on this?

I think they should get in, but the investors have to know that markets are cyclical. I wish I could tell them the markets are better in the summer, but they’re not. The volume is more precarious.

Just so they know, when Thanksgiving arrives, markets firm up. We get an early January effect. There’s a lot of year-end pension funding.

With that Santa Claus rally.

Correct. And then from January to April, we get more pension funding, and the markets are just better then.

I know some people like to sell in May and go away. A lot of it is we might just feel better on Thanksgiving.

You know, the royal wedding was a classic case of that. During the week of the royal wedding, my average British stock was up 12.48%. My average Bermuda stock was up 5.82% and I only had one Indian stock, which was up 27.47%. So apparently the week of the royal wedding, they all felt good and we had natural appreciation.

So we do have get to a point where as a country, we just cheer up, and we do tend to naturally cheer up as the holidays approach. I don’t know if it’s the football or the turkey or what it is.

I’ll take any of it.

That’s right.

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