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The Dow Jones Industrials plowed ahead
last week, hitting its thirteenth new high in 18 days. Market
optimism was driven, in part, by the fact that nearly three-fourths
of major companies have reported higher-than-expected profit
for the third quarter of 2006, according to MarketWatch.
Then, on Friday, the market's momentum
was checked when the Commerce Department reported that economic
growth, as measured by the Gross Domestic Product (GDP) of
the United States, was just 1.6% for the third quarter. That
was well below analysts' expectations for 2.1% growth,
and continued the slowing trend we've seen throughout
the year. According to Yahoo! Finance, during first quarter,
economic growth was 5.6%--the fastest rate in almost
three years. During second quarter, growth was 2.6%--largely
because of high energy prices and high interest rates. Third
quarter's poor showing was attributed to a 17% drop
in residential construction activity.
What should investors be keeping an eye
on?
As mentioned in last week's newsletter,
we are seeing a divergence in sentiment from the individual
investor and corporate insiders. Last week we the saw an
improvement in Michigan's Consumer Sentiment index
while corporate insider selling surged.
Vickers notes that corporate
insiders of stocks traded on the NYSE ramped up their selling
activity last week to 7.81
shares sold for every share bought. On the NASDAQ, the
insider sell/buy ratio shot to 6.36. Both ratios have more
than doubled
over the past few weeks. With the DOW hitting new highs
& clues
from corporate insiders, one wonders if investors should
follow Warren
Buffet's
words of wisdom:
"Be fearful when
others are greedy; be greedy when others are fearful."
-Warren Buffet
| Returns through 10/27/06 |
1-Week |
Y-T-D |
1-Year |
3-Year |
5-Year |
10-Year |
| Dow Jones Industrials |
0.7 |
12.8 |
16.2 |
7.7 |
5.3 |
7.2 |
| Nasdaq Composite |
0.4 |
6.6 |
12.5 |
7.6 |
6.6 |
6.8 |
| Standard & Poor's
500 |
0.6 |
10.3 |
15.0 |
9.9 |
4.9 |
7.0 |
Source: Yahoo! Finance, Barrons
Past performance is no guarantee of future results. Indices
are unmanaged and cannot be invested into directly.
Three-,
5-, and 10-year returns are annualized. Assumes dividends are
not reinvested.
WILL THE RULE OF 20 REGAIN POPULARITY? Back
in the 1950s and 1960s, investors would use the Rule of 20
to determine the appropriate price-to-earnings (PE) multiple
for the market. Although there appear to be many different
versions of the rule, The Financial Times Rule of 20
is that the market is fairly valued when its PE ratio equals
20 minus
the current rate of inflation. When inflation is high, a company's
future earnings are worth less than today's earnings.
Consequently, the company should attract a lower PE multiple.
With the PE ratio of the Standard & Poor's 500 Index
at 18.44 on October 27, 2006, and core inflation at about
2.5%, the market would appear to be fairly priced, according
to this rule. Whether the market follows this rule or not
is another question.
Weekly Focus -- Crack the Code
Instructions: Select the correct letter from the words
in uppercase in each line.
Put these letters in the same order and find the secret word.
My first is in ROSE but not in NOTE.
My second is in HAIL but not in ROLE.
My third in YELLOW you will find.
My fourth is in KIT but not in KIND.
My fifth is in HOPE and also HEAD.
My last is in MEET but not in TREAD.
My whole in song is often heard.
A rather oddly spelled word. |
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Answer to Sept 25 Puzzle:
Answer to October 23 Puzzle: Saturn!
The ancient Babylonians chose to organize their calendar
around 7 days of the week, and each day corresponds
to one of the seven "planets" visible
to the naked eye. Saturday is ruled
by Saturn. |
Best Regards,
Ken Ford
P.S. Please feel free to forward
this commentary to family, friends, or colleagues.
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