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<ul><li><p>8/14/2019 Research to Think About</p><p> 1/18</p><p>Research to think about</p><p>1) May 30, 09: what will happen after May? Stocks are too expensive!2) End may 09: correction isnt coming yet3) May 09: US Bank shares being pumped and dumped</p><p>4) May 09: on Market Manipulations5) May 09: PE Ratios are too high!6) 1 May 09: Why Rally is unsustainable7) April 09: Explaining Generational Bottoms</p><p></p><p>With trading in May finished, we can look back at the month in its entirety anddefinitively say the old market adage,Sell in May and Go Away was wrong as could</p><p>be. The month of May was the third straight month of positive returns in the U.S.equity indexes, the first such streak since August through October of 2007. The S&amp;P500 finished more than 5% higher for the month, in comparison to the 9.4% gain inApril and the 8.5% gain in March. The rally in equities has indeed been impressive asthe S&amp;P is up more than 25% in the past three months, and an amazing 38% from thelow point in early March.</p><p>It was not just stocks that enjoyed May, but crude oil also posted a huge 29% gain inMay, its largest one month gain since 1999. The price of crude finished the month justshy of $67 per barrel, even as OPEC decided that no further supply cuts werenecessary. Oil was not alone either as in general commodities were all propelledhigher by the devaluation of the dollar. The basic materials index (IYM) gained closeto 14% on the month, which outpaced even gold, the traditional hedge againstinflation as SPDR Gold Trust (GLD) was up about 10%. The combination of thedollars rapid decline and the prospect of economic growth on the horizon has</p><p>propelled commodities to rebound quite strongly.</p><p>The question now is what to expect for the summer months ahead. At Ockham, we arenot market timers and think that it is foolish for anyone to claim they know where themarket is headed in the short term. However, here are some observations that we thinkmay be important to keep in mind over the coming months.</p><p>The stock market is no longer cheap. An argument couldve been made that themarket was cheap in Feburary, March, and April, but it is increasingly hard to justifyany longer. Remember, this is very different than saying the market is headed down,</p><p>but we believe that the gains of the past few months are still vulnerable. According toBarrons online, the S&amp;P 500 is far more expensive than it was a year ago accordingto a standard price-earnings ratio. A year ago when the S&amp;P 500 was in the high1300s the P/E ratio was about 22x, but given the massive declines in corporateearnings expectations Barrons pegs the P/E at 123x! These numbers are as of May25th so next week could go either way but you get the gist.</p><p>Our internal calculation of the S&amp;P 500 valuation is not quite as extreme as Barrons,but it is hovering at about 46 times current earnings. Obviously, our earnings</p></li><li><p>8/14/2019 Research to Think About</p><p> 2/18</p><p>expectations have not fallen quite as far as Barrons, but according to our estimateswe are seeing earnings that have declined 79% since the peak in 2007 and 72% fromone year ago.</p><p>The fundamentals of equities have not improved in the last few months enough to</p><p>justify these gains, in fact most indicators have not improved much at all but theperception is that the worst is behind us and growth will ensue. That may be the case,and we certainly hope it is, but it demonstrates to us that the market is currentlytrading on emotion and psychology rather than based on fundamental improvements.Investor sentiment and consumer confidence have both improved markedly over the</p><p>past three months. The hope of better days ahead has been a powerful driver andcould continue until corporate earnings truly do start to rebound. However, if theeconomy hits a bump and fear, uncertainty, and doubt start to creep back into the</p><p>picture the recent market rally could very easily turn to dust because it was built onsentiment and not fundamentals.</p><p>Both sentiment and fundamentals are a completely legitimate and necessarycomponents to market action, but in comparison to fundamentals, sentiment can beextremely fickle. How long can better than expected be enough to carry the recentgains in the equity indexes? We are of the opinion that the current rally has beenlargely devoid of fundamental improvement, which makes it all the more vulnerable.At Ockham, we quote Ben Graham often, and this seems a very appropriate time toreference his Security Analysis: Stock markets behave like a voting machine in theshort term, while in the long term they act like a weighing machine.</p><p>-=-=-=</p><p>Telltale Signs That a Significant Correction Isn'tImminent</p><p>As has been the case for a while now, in regard to financial stories reported in themedia, a breaking story is reported that is often followed by a completelycontradictory story just several weeks later.</p><p>The latest example of this is the following. On May 6, Friedman, Billings, RamseyGroup analyst Paul Miller stated that J.P. Morgan Chase &amp; Co. (JPM) would</p><p>probably be the only one of the 12 commercial banks submitting to the stress tests that</p><p>wont need more capital. Several weeks later, on June 1st, J.P. Morgan Chase (JPM)announced that it planned to raise $5 billion in a secondary offering.</p><p>Other large financial institutions, such as American Express (AXP) and PrudentialFinancial (PRU) also announced respective secondary offerings of $1.25 billion and$500 million.</p><p>In my May 12th article, US Bank Shares: The Pump is Almost Over, Get Ready forthe Dump, I noted the urgency of many financial institutions to complete theirsecondary public offerings of stock and debt as soon as possible. However, given</p><p>that one of the biggest beneficiaries of this crisis, JP Morgan, has just announced asecondary offering that may not be completed until the end of June, we can now be</p></li><li><p>8/14/2019 Research to Think About</p><p> 3/18</p><p>assured that the markets will not experience an extended correction until JP Morganhas completed its secondary offering.</p><p>Thus for now, we can expect this US market rally to continue or at least to channel upand down for a little while longer without an extended downturn until JP Morgan and</p><p>other large financial institutions have completed their secondary offerings. Whilevolatile trading days over the next couple weeks is not out of the question, and evenlikely, I believe that the volatility will remain range bound in the very short-term.</p><p>Since JP Morgan just announced its intentions to raise capital yesterday, it is highlyunlikely that we will see a strong, sustained downward trend in US marketscommence for at least another couple of weeks if not a couple more months.However, other important triggers in the international world outside of the US willdetermine if we see this sustained downward trend in a couple of weeks versus acouple more months.</p><p>The US stock market is a vastly different creature from the US economy, and due tomassive government intervention, the US stock market can continue to rise forextended periods of time even while the fundamentals of the economy continue todeteriorate. There is no experienced, diligent observer of US stock market behaviorthat will deny the existence of huge anomalies in market behavior in recent weeks that</p><p>point to massive intervention.</p><p>Just considerthis video(Dan Schaffer, May 14 2009 at where thecommentator notes that during one recent trading day, an estimated $10 to $20 billionentered the US markets and traded S&amp;P futures contracts to prop up general USmarket indexes during the last 7 minutes of the trading session. In response to thismassive injection of capital in the last 7 minutes of market trading, the analyststates, Who has that kind of money to move the market? The answer, of course, isthe Plunge Protection Team.</p><p>I, myself, in carefully monitoring US stock market behavior in recent weeks, haveseen these same massive anomalies indicative of market intervention specifically inthe trading behavior of many large US financial stocks. Though the bottom title in thisvideo states, Is the Rally Over?, there is little doubt and should be little argumentover the fact that the US Federal Reserve and the US government will not allow therally to end until their favored financial institutions have had adequate time to</p><p>complete their secondary offerings at artificially propped-up share prices.</p><p>Do I still believe a very large correction is inevitable in the future? Of course. Andwhen it happens, it will most likely be a very drastic event. But certainly, the PlungeProtection Team will not allow the downturn to commence until after all large USfinancial institutions have had a chance to complete their secondary offerings.</p><p>US Bank Shares - The Pump is Almost Over, Get Ready for the Dump</p><p>May 12th, 2009</p><p>For the past couple of weeks, bank shares have grown in share price faster than asteroid-induced bicep. There has not been much reported by the media in terms of</p></li><li><p>8/14/2019 Research to Think About</p><p> 4/18</p><p>negative news about the US financial industry from Ben Bernanke, bank CEOs, oreven the Federal Reserve, even though the bank stress tests resembled a publicrelations campaign much more than a stress test. Despite the rosy picture painted bythe financial media of the US banking industry and the consensus that the worst is</p><p>behind us now by financial executives, the 3-ring circus that is the US Federal</p><p>Reserve, the US financial industry, and the US Treasury still cant seem to get theirstories straight.</p><p>Consider the following highlights (or lowlights depending on your viewpoint) from astory released by Bloomberg on May 11th:</p><p>Bank of New York Mellon Corp., Capital One Financial Corp., U.S. Bancorp andBB&amp;T Corp. will sell shares to repay U.S. aid after stress tests showed they dontneed additional cushion against a deeper recession. BNY Mellon, the worlds largestcustody bank, said today it will sell $1 billion of stock in a public offering and mayuse the funds to repurchase preferred shares sold to the U.S. Treasury under the</p><p>Troubled Asset Relief Program. Capital One said it would sell 56 million shares ofcommon stock to raise as much as $1.55 billion, U.S. Bancorp said its sale would totalabout $2.5 billion and BB&amp;T began a public offering of $1.5 billion of stock whilereducing its dividend.</p><p>Regulators examining the 19 largest U.S. lenders last week said the four firmswouldnt need more capital to survive a deeper, longer recession. U.S. Bancorp ChiefExecutive Officer Richard Davis and BB&amp;T CEO Kelly King had both said theywanted to repay their $6.6 billion and $3.1 billion in TARP funds as quickly as</p><p>possible. BNY Mellon got $3 billion from TARP.</p><p>This was something that was really hanging over the group, so a lot of peoplesviewpoint on it is that, Hey, the worst-case scenario got taken out, this groups goingto still be around, said Kevin Fitzsimmons, a Sandler ONeill &amp; Partners LP analyst.</p><p>Capital One, the McLean, Virginia-based credit-card lender that received $3.56billion from TARP, said in a statement it would sell shares at $27.75 each, an 11percent discount to the banks $31.34 closing price on May 8. The shares dropped$4.24, or 14 percent, to $27.10 at 4:03 p.m. in New York Stock Exchange compositetrading.</p><p>KeyCorp, which the government deemed needed an additional $1.8 billion in capitalafter the stress test, today registered to sell as much as $750 million in commonshares. The bank said it expects to raise about $739.4 million from the offering afterexpenses and commissions.</p><p>Cleveland-based KeyCorp, which last month slashed its dividend to 1 cent, said thatbecause of the economic and regulatory environment the company didnt expect toincrease the quarterly dividend for the foreseeable future and could further reduce oreliminate our common shares dividend.</p><p>We firmly believe this action is in the long-term best interests of our shareholders</p><p>and our company because of the risk and uncertainty associated with being a TARP</p></li><li><p>8/14/2019 Research to Think About</p><p> 5/18</p><p>participant, BB&amp;Ts CEO Kelly King said in a statement. King said the decision tocut the dividend was the worst day in my 37-year career.</p><p>Banks that accepted TARP money are subject to government oversight andrestrictions on compensation that that they say put them at a disadvantage to</p><p>competitors. Banks that want to repay the funds must get approval from thegovernment and show they can sell debt in the public market without federal</p><p>backing.</p><p>U.S. Bancorp also plans to sell $1 billion of five-year notes without a governmentguarantee as soon as today, according to a person familiar with the offering whodeclined to be identified because terms arent set.</p><p>Wells Fargo &amp; Co., which the government said needed $13.7 billion in additionalcapital, raised $8.6 billion selling shares last week, more than planned. GoldmanSachs Group Inc. in April, before stress test results were released, said it would raise</p><p>$5 billion to repay federal rescue funds. Principal Financial Group Inc., the DesMoines, Iowa-based life insurer, today said it would offer 42.3 million shares to raisefunds for general corporate purposes.</p><p>Morgan Stanley last week raised $8 billion by selling stock and debt. The stress testsfound that New York-based Morgan Stanley needed $1.8 billion in additionalcommon equity as a buffer against potential losses.</p><p>S...</p></li></ul>