Aberdeen Investment Management, Inc.

Posted By admin on July 18, 2010

General Market Comment:   July 19, 2010

(The following market commentary can also be viewed at the following linked pdf file: General Market Comment July 19, 2010)

We have had quite a roller coaster in the equity market.  No one would have guessed the market volatility or the extremity of sentiment we have seen if the only information they had to go by was that 1) S&P 500 earnings grew 92% in Q1 over 2009, 2) earnings look to grow 43% in Q2, 3) inflation is trending down, 4) interest rates are down and 5) employment and personal consumption are up.  These facts are all true.  

I have written in recent weeks that market conditions were remarkably oversold and that stocks are testing historic low valuations.  I was discussing all this with another money manager friend – Shad Rowe of Greenbriar Partners – who made a very interesting point.  He noticed that if one looked at the “p/e ratio” of 10 year Treasury bonds (i.e. divide 100 by the yield) no one would believe that bonds were anything but grossly overvalued.  I decided to have a look at this and generated the following chart contrasting the p/e ratio of the S&P 500 compared to the implied “p/e ratio” of the 10 year Treasury.   The 10 year Treasury is yielding 2.9%.  The earnings yield on the S&P 500 is 6.7%.  Have a look.Treasuries are trading at an implied p/e ratio of 34X.  This is extreme to say the least.  With stocks, earnings can improve and drive up the value of the shares.  With bonds – well the amount of income is “fixed” – that’s why they call it “fixed income” – eh?  So if the “p/e ratio” of bonds is at an extreme high and income is fixed the only thing that can adjust if the “p/e ratio” should decline is price . . . and the “adjustment” would be down. 

The markets don’t like bubbles and that’s what we have in Treasury bonds.  They don’t like high p/e ratios.  The reason bond prices are so high and rates are so low is there is broad consensus that the economy and more specifically, corporate America, is at the precipice of a material slow down – mind you most don’t say “decline” – just “slow down”.  Given that the broad consensus is usually wrong, the easy contrarian bet is that the “slow down” won’t be so bad. 

So, Snap Out It! . . . Go Buy some stocks! 

I have stated all year I would not be too concerned if we had some pullback in prices.  I doubted we would see appreciable downside “failing some exogenous shock to our collective psyche”.  Well – we had the “exogenous shock” – the European debt crisis and the Gulf of Mexico oil spill – and we had a correction in stock prices.  Now we have entered what should be a very respectable Q2 earnings season with prices lower and interest rates also lower.  The combination of the those factors – rising earnings, low interest rates and lower prices should result in a resumption in rising equity prices. 

Please do not hesitate to call if there are any questions. 

Regards: 

Jeb Terry

Wk:   214-347-9114

Cel:   214-552-6708 

Caution: It’s a risky world we live in. My opinions are based on information believed to be reliable but hey, I could be wrong.  When investing, try to use good judgment and don’t hesitate to seek professional assistance. Remember to set limits and have a plan. . . Good Luck!

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Posted By admin on July 17, 2010

The Wildebeests are Running Again . . . When there is panic in the herd there is money to be made.  

“Most people get interested in stocks when everyone else is.  The time to get interested is when no one else is . . .” – Warren Buffett

I have never seen as strong a confluence of indicators in support of a market bottom and prospects for a rally.  

• A record number of consecutive down days in the QQQQ  
• Extreme oversold market conditions  
• There has not been a sustained decline in the market when there is strong earnings growth such as seen in the market up to now and expected for Q2.  
• The earnings yield has not been as strong as now since September 1990 – a bear market bottom. The spread between the earnings yield and the 10 year Treasury rate is the widest since 1979 when the S&P 500 gained 12.3% for the year.  Spikes in the spread such as now have been coincident with market bottoms.  
• The combination of low Treasury rates and a high earnings yield results in a near record low undervaluation.  We have haven’t seen this low a valuation since December 2008 and March 2009 – the panic lows of the last bear market.  
• We have not had a recession or a bear market when the yield curve is as steep as now.  

The recent sell off seems to be an extreme reaction.  The next news wave will be earnings related.  There is over $800 billion of cash at S&P 500 companies available for M&A and stock buybacks which increased 80% in Q1 from 2009.  It is normal to expect buybacks to pick up following earnings reports – like those coming up this month.

March 2009, with similar conditions as now, marked the start of a greater than 90% move from the NASDAQ low to the April 2010 high close.  July 2010 could mark the start of a similar move.

Please following link for the complete note and attendent charts.

The Wildebeests are Running Again 7-2-10

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Posted By admin on June 21, 2010

Now that we have had a 15% correction in the NASDAQ – what’s next?

The NASDAQ peaked on April 23 after 8 weeks of consecutive gains.  It has apparently bottomed on June 9.  I made note in April that extended strings of up weeks were generally precursors to even more movement to the upside punctuated occasionally by modest pullbacks.  Of course a 15% correction qualifies as more than a “modest pullback”.  Nevertheless, I submit that the combination of economic data, earnings outlooks, interest rates and liquidity still favor a rising instead of a falling equity market.

There continues to be a great deal of fear about sovereign debt risks in Europe.  People are forgetting to consider how European corporations are doing.  The following table from Thomson Reuters as of June 18 displays the estimated annual earnings growth, P/E ratios and ratio of negative to positive earnings revisions by country – you will be surprised – I was. (FY1 is 2010 and FY2 is 2011).

Only Spain appears to be a laggard in Europe.  While there are certainly going to be fiscal consequences of the sovereign debt crisis it is not a given that profits will be similarly impaired for the very globalized European corporate community.

So, what’s the bottom line? . . . 

I stated in April and in May I would not be too concerned if we had some pullback in prices.  I doubted we would see appreciable downside “failing some exogenous shock to our collective psyche”.  Well – we had the “exogenous shock” – the European debt crisis and the Gulf of Mexico oil spill – and we had a correction in stock prices.  Now we approach what should be a strong Q2 earnings season with prices lower and interest rates also lower.  The combination of the those factors – rising earnings, low interest rates and lower prices should result in a resumption in rising equity prices.

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Posted By admin on June 8, 2010

Aberdeen Investment Management, Inc. Collaborates With Research 2.0

Aberdeen Investment Management, Inc. (AIM), is pleased to announce that it has entered into a collaboration with Research 2.0, a next generation technology research firm based in Boston, to provide research services to AIM on publicly-traded, emerging technology companies.  AIM has been providing advice to high net worth clients on micro cap, emerging technology companies since 2003.

Research 2.0 brings decades of experience in evaluating both public and private technology enterprises.  Their founder and Director of Research, Kris Tuttle, formerly ran a 70 person research organization for Soundview Technology Group, which has been described as the leading technology research boutique on Wall Street during the late 1990’s.  Kris also previously served as Director of Research for Adams Harkness & Hill, a well regarded Boston-based regional broker dealer, prior to its acquisition by Canaccord Capital.  He brings particular expertise and knowledge in software businesses.

Steve Waite, head of Strategy for Research 2.0, was a co-founder of a multi-billion dollar investment management firm, Trilogy Advisers.  Steve has managed a number of long-only technology and global equity portfolios.  He is a noted author of two books on investing, and has extensive experience on both the buy and sell side of Wall Street, having worked with several firms including Morgan Stanley, The Capital Group, Merrill Lynch, and Credit Suisse Asset Management/BEA Associates.

AIM’s President, Jeb Terry, stated “the collaboration with Research 2.0 will allow AIM to expand the depth and reach of its technology research that will incorporate the best ideas generated by Research 2.0.”  Research 2.0’s research approach and coverage compliments AIM’s core micro cap, emerging technology focus, and will expose AIM to larger market cap opportunities.

AIM and Research 2.0 each believe the correct strategy to capture optimal upside is one of long term investment predicated on a thorough investigation of the target investment’s business model, addressable market, competitive strengths and weaknesses and intellectual property.  AIM’s present strategy and micro cap focus recommends relatively concentrated investments to maximize returns with minimal turnover and without the use of leverage. In addition, Research 2.0’s resources will bring further diversification of AIM’s investment process with a focus on larger cap technology companies who are strategically well-positioned with global operations benefiting from many of the same waves of technology innovation that are central to the AIM portfolio.

Interested parties can learn more about AIM’s emerging technology practice at their web site at www.aberdeeninvestment.com .  They can contact Jeb Terry, President, via email at jbtsr@aberdeeninvestment.com  or by phone at (214) 347-9114. 

More information on Research 2.0 can be found at their web site: www.research2zero.com . Their principals can be reached by e-mail and telephone as follows:

Kris Tuttle        kris@research2zero.com          617-828-6462

Steve Waite      steve@research2zero.com        203-537-0263

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Posted By admin on June 3, 2010

Several indicators are pointing to a near term recovery from the recent market correction.

For example . . .  The retail money has yanked money from equity mutual funds.  The following chart from BofA Merrill Lynch shows they fled equities at a rate never seen before except at the panic points of Oct/Nov 2008 and March 2009 – the Great Recession market low.

Bespoke Investment Group (www.bespokeinvest.com) has pointed out that spikes in bearish investor sentiment coincide with market bottoms.

Of course the S&P 500 remains near an all time degree of undervaluation in relation with earnings growth and the 10 year Treasury rate.

Bottom Line:             The data rarely presents a more obvious case for a rising stock market.  The prospect for a very strong employment report tomorrow could be the icing on the cake.

 Jeb B. Terry, Sr.

President

Aberdeen Investment Management, Inc.

jbtsr@aberdeeninvestment.com

Tel: 214-347-9114

Cell: 214-552-6708

Caution: It’s a risky world we live in. My opinions are based on information believed to be reliable but hey, I could be wrong.  When investing, try to use good judgment and don’t hesitate to seek professional assistance. Remember to set limits and have a plan. . . Good Luck!

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Posted By admin on May 21, 2010

The S&P 500 now 51% undervalued relative to Treasuries 

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• S&P 500 is down 10.9% from April high, down 2.8% year to date – so far it’s a correction that falls within the bands of “normal”.
• The S&P 500 has been this or more undervalued only twice since 1970 – it was 59% undervalued in December 2008 and 50.1% undervalued at March 31, 2009.
• The S&P 500 was up 23% 12 months after Dec. 2008 and up 47% 12 months after March 2009. 

 The market is cheap and oversold.  Today may be the point of the “THUD”

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Posted By admin on May 17, 2010

General Market Comment:   May 17, 2010

(The following market commentary can also be viewed at the following linked pdf file: General Market Comment May 17 2010)

 The market, as I define as the NASDAQ here, is down 7% over that last 21 days.  Are market lore, cycle theories, some market internal measures, fear of a spreading Eurozone crisis and general pessimism sufficient reasons to continue to “sell in May and go away” as the saying goes? 

My read of the data says you may want to think twice before you dash for the exits.

My indicators continue to be consistent with early stages of a bull market that will increasingly be led by technology, i.e. our kinds of companies.  This view is not inconsistent with a notion that the economy – while exhibiting robust year over year gains in all manner of macro economic measures – is still far from performing at its full potential.  This fact bolsters the case for subdued inflation and interest rates – which are conditions that are supportive of rising earnings and stock prices.  

The following chart from Thomson Reuters displays the earnings for the S&P 500 since 2005.

There are legitimate concerns about the Eurozone debt crisis.  It is not clear to me that the restructuring of the PIIGS debts will either stop European economic growth or drag the rest of the world into a financial crisis.  As the analysts at the Bank Credit Analyst noted – the crisis had reached the “riot point” and hence commanded forceful and coordinated policy responses such as we saw last week and are likely to see more of going forward.  There is much about the crisis that I characterize as being resolvable “with a stroke of a pen”.  Don’t get me wrong – there are fiscal consequences, but central bankers and governments have demonstrated a willingness to act decisively to stop financial panics as has been unfolding in Europe. 

So, what’s the bottom line? . . . There are many brick masons ready and willing to add to the proverbial “wall of worry” that the stock market has to climb.  There is undeniable historical evidence that the period from May through October is a weak period for stocks but that does not mean that they won’t rise this year.  Stocks rise when earnings outlooks are rising and interest rates are stable . . . kinda like now . . . The recent market correction is not alarming given the youth of the economic recovery, the persistence of easy of monetary conditions and the strength in earnings.

 I stated in April I would not be too concerned if we had some pullback in prices.  I remain of that conviction.  I doubt we will see appreciable downside from current levels failing some exogenous shock to our collective psyche. 

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Please refer to the latest Market Analysis report dated March 9, 2010 entitled “Spring Returns to the Serengeti” on our web site www.aberdeeninvestment.com for more data supporting our opinions on the economy and the market.

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Posted By admin on April 18, 2010

General Market Comment:   April 19, 2010

There is justifiable questioning if the terrific rally since the 2009 market low is sustainable.  We can point to market lore, cycle theories, some market internal measures and general pessimism to find reasons to want to prepare to “sell in May and go away”.  The business press will increasingly be full of calls to “take profits” . . . music to a broker’s ear –eh? 

But the data tells a different story.  My trusty indicators such as the yield curve, money market and mutual fund flows, money supply, earnings growth and the leading economic indicators are all telling me that we are still in the an early stage of a bull market that will increasingly be led by technology, i.e. our kinds of companies. 

The following chart from the Bespoke Investment Group (www.bespokeinvest.com) displays periods when the market has had prolonged periods of rising prices without the occurrence of typical corrections – such as we have just experienced.  We went 51 days without a 1% pullback until Friday’s 1.6% pullback in the S&P 500. 

Other “factoids” that lend support include the following: 

From an article in Barron’s on 4-12-10 we have the following comment:  There have been eight consecutive weeks of net inflows into domestic stock funds, with institutional investors setting the trend. Individuals began following suit three weeks ago. The flows are still relatively meager — $11.5 billion the past four weeks, according to Cambridge, Mass.-based fund tracker EPFR Global — but, importantly, they are consistent. Not since 2004 have U.S. equity funds posted positive inflows for a full year. Tired of missing out as stocks continue to rise after the biggest market rally since the Great Depression, and gaining more confidence in an economic expansion, investors are showing signs of favoring stocks over long-preferred bonds.  

There is a boom going on in semiconductors.  A March survey of sales results in the industry performed by the ChangeWave Investing shows the best outlook in over 4 years.  Semiconductors are the new “Dr. Copper”.  Semiconductors are increasingly embedded in all manner of products from toys to industrial equipment to smart meters.  In the past, economists could have a sense of the strength or weakness in the economy by tracking the price and order book for copper hence the term “Dr. Copper”.  Today semiconductors are telling us technology spending is rising.  The price for Intel stock is also telling us good things are happening in technology as it is up 21% since February.

Money market fund activity is also sending us bullish signals.

There is a legitimate concern about last week’s news of the SEC bringing fraud charges against Goldman Sachs.  To be sure this is part of a larger political development to re-regulate Wall Street and to make sure someone is made to pay for the subprime mortgage fiasco of 2007-2008 that nearly ended life as we know it.  There will likely be more legal action brought against other players in the drama.  . . . Will it take the current bull market down with it? . . . Nope . . . although it will be unpleasant for Goldman Sachs – I don’t believe life threatening – but very expensive and very unpleasant.  Will it impair the capital market’s ability provide liquidity?  . . . Nope.

So, what’s the bottom line? . . . The financial stocks will be roiled by the Goldman affair as people try to guess the ultimate extent of the cost to Goldman and who else might be pilloried in public.  This will be mitigated by a parade of companies with improving earnings and brightening outlooks.  So far, Thomson Reuters reports that 48 S&P 500 companies have reported earnings.  An amazing 83% of them have beaten estimates and only 8% have missed.  Normally 21% miss estimate.  In aggregate, the earnings are 23% above estimates which is over 10X greater than the average surprise factor since 1994.  While the percentage of companies beating estimates will surely drop as we proceed into the earnings season we can be certain that earnings will be above average growth and above the average “beat” rate.  Rising earnings => rising stock prices.

I will not be too concerned if we have some pullback in prices in the coming weeks.  The action should be more akin to base building in preparation for a strong finish to Q2.  I will provide some prognostication on Q3 when I next report in May. 

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Please refer to the latest Market Analysis report dated March 9, 2010 entitled “Spring Returns to the Serengeti” on our web site www.aberdeeninvestment.com for more data supporting our opinions on the economy and the market.  

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Posted By admin on March 14, 2010

General Market Comment:   March 15, 2010

The recent stock market recovery has the perma bears twisted in knots.  The balance sheet purists believe that “by God things should be marked to market” and “hells bells, the banks are broke and the central banks are broke and the consumer is broke and whole countries are broke . . .  and the world as we know it is coming to an end”  . . . and by the way – don’t dare ask them to disclose the “naked shorts” they have on in the CDS market which they of course don’t want to be regulated – Noooo – not that!

Well – maybe they are right. 

I can observe, however, that a rising stock market has always accurately anticipated an economic recovery (according to Bank Credit Analyst – and I agree with them).  A falling market has often inaccurately discounted a recession.  Now there are those who will say “BUT my friend,” “the market has done its job, gone up enough, called the Q4 GDP growth – and now we are doomed” . . . not likely. 

So . . . as I said in January . . . “we have a sufficient number of energetic and vocal skeptics to prop up the proverbial “wall of worry” needed to sustain a bull market, a looming pile of catalytic data in the form of Q4 earnings reports, plenty of cash still poorly invested . . . that all seems to suggest we have more risk to the upside in stock market values in the near term”.   Now we can substitute Q1 earnings for Q4 and rock on. 

Please refer to the latest Market Analysis report dated March 9, 2010 entitled “Spring Returns to the Serengeti” on our web site www.aberdeeninvestment.com for more data supporting our opinions on the economy and the market.

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Posted By admin on March 12, 2010

Please refer to the new chart stack on our Market Analysis Page.

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