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In this pre-election update...

***** Not a stock market, but a market of stocks.
***** Incredible deals that won't last long.
***** Keeping an eye on the long-term picture.
***** Election fever has us excited too.
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Last week, stock prices proved falling is not their only trick by posting a nice little gain.  Whether because of enticing values or government stimulus, rallies periodically occur even in the worst markets, when stocks become too good to resist.
The big question is whether last month will go down in history as a major market bottom.  We can never say except in hindsight, though our indicators suggest the market has more upside than downside potential right now.  It would surprise us if the market took out last month's low in the near future.
Not that we wholeheartedly agree with the bullish argument right now that stocks are both dramatically oversold and downright cheap – cheaper in fact than they have been in quite some time.  We must acknowledge that stocks may be cheap, but they are not historically cheap.  The S&P currently sells for 20X earnings (well above what has traditionally been considered great value).  The Dow, meanwhile, which has sold for as low as 6X earnings in recent memory, is currently priced at over 10X earnings.
So stocks are certainly cheaper than they were two months ago, but not so cheap that even cheaper would be impossible.
But let's stop using the word “cheap,” for now, and instead take a closer look at today's so-called bargains for more practical insights...

A HISTORIC BUYING OPPORTUNITY

Though stocks in general have not hit record lows, many individual stocks have hit all-time lows in terms of fundamental metrics.  In this situation, it makes sense to follow Warren Buffett's lead and pay more attention to individual stocks than the market as a whole.
We will outline this strategy in more detail in your next issue of TCI.  For now, let's just consider one stock in particular: Coca Cola (KO).
It's hard to imagine this growth stock being dramatically affected by the worldwide economic upheaval.  China, along with all of Coke's other major markets, is inflating as fast as it can by lowering interest rates, spending massively on infrastructure, and doing everything else to support consumer spending.  Cola is a affordable product which seems almost addictive in its appeal.  We expect it will continue to gain market share, particularly in the developing world.
Yet, Coke offers investors today a hefty dividend of some 3.5%.  It has a free cash flow yield over 5%.  What's more, its P/E of 14 is the lowest ever for this company – lower even than in the 1973-4 bear market.  Of course, the stock price could retreat a little further.  But at the moment, it seems to be discounting an economic disaster far worse than even the most bearish economists are discussing today.  In other words, it's hard to imagine that buying this stock could be anything but a great move today.
The other sector offering exceptional value is energy. Schlumberger (SLB), for the first time in its history, traded at less than 10X earnings last week.  Its free cash flow yield is over 5% - the highest in its history.
The same is true for another of our oil service favorites, Transocean (RIG).  The only time we typically see P/E ratios fall this far among oil service stocks are periods when investors anticipate a major slowdown in oil demand.
Sure, oil prices have retreated considerably since last spring, and may not have reached their absolute bottom.  But it seems pretty clear that the market has misread future demand for oil.  
For example, a Baker-Hughes executive recently made the following comment at a conference:  
“Tight liquidity is making itself felt more in the U.S. than internationally.  A cycle of reduced activity has the potential to be different and possibly more dangerous than previous slowdowns because oil production would decline quickly.”
 Let's also consider that the head of Eni SpA (E), the major Italian oil company, has said oil prices must remain above $70-$80 a barrel or else current projects would have to be shelved.
Clearly, if oil prices remain under $70, we will see a shortage of new supplies coming online.  Unless the entire world falls into a severe recession, demand would overwhelm existing supplies in the near future.  And that will mean oil prices will shoot very high, very quickly.  
So we think it makes sense to stock up on shares of companies like Schlumberger and Transocean now, while they are close to all-time lows.  This is a historic buying opportunity, for these stocks certainly won't remain inexpensive as the world runs out of surplus energy.
Of course, all our recommended companies, including Coke, Barrick (ABX), General Electric (GE), and even Intel (NTC) and Mosaic (MOS) could dip a little more before they start to rise.  But the fact that all of them are at historic lows means that your downside risk is very low as well.  That's not true about the market as a whole, but it is true about our picks.
We should also point out that not one of our recommended stocks has been downgraded by any rating agency, despite the sell-off.  Their ratings have all survived intact the most brutal 4-6 week period we have ever witnessed.
One thing more to think about...

A NEW HOPE

When you read next week's update, Americans will have elected a new President.  Whoever he is, whether McCain or Obama, he will arrive at the Oval office with considerably greater popularity than the man who sits there now.  This will have a big positive effect on the psychology of the markets and the American consumer.
The new President may also begin his term with another big stimulus package.  And the result may be a shot of adrenaline for stock prices and the economy as well.
We also find hope in the fact that the current crisis has lasted only for six or seven weeks (it just feels longer).  Before then, we were on course for a mild recession at best.  It was the bankruptcy of Lehman Brothers that turned the recession into an economic calamity.  The cure for that misfortune is a massive injection of money into the financial system, and that is exactly what the Fed is administering.  Fortunately, the cure should be felt reasonably quickly.
In time, investors will take their eyes off the immediate situation and look to the future.  There, they will see rising earnings and economic activity, and things generally looking brighter.
Further ahead, what will cap the market will be rising inflation.  Considering the fundamentals of oil and other resources, we have a hard time constructing a scenario in which commodity prices do not fly to the moon once growth turns positive again.
Remember that all countries in the world today, including China, India, the U.S., Europe, etc., are fighting to prevent a serious economic slowdown.  In the U.S., we have already had enough of a taste of slowdown to realize the importance of restoring growth.  In China, the need is far worse.  A prolonged recession there could wreck the country.  For that reason, we are sure the Chinese will do everything possible to pump up their economy.
As we pointed out above, whatever China does to stimulate growth will be good news for companies that are expanding into the Chinese market, including Coke, Intel, Procter & Gamble, and Johnson & Johnson.
Bottom line:  if your investment time-frame is more than a few months, this is a great time to load up on our Growth Stock recommendations.

Until next week,

Stephen Leeb, Ph.D.
Editor
The Complete Investor

November 3, 2008

TCI Red Alert

November TCI Portfolio Changes

Growth Portfolio
Buy:       Masco (MAS)

Income Portfolio
Buy:       Plum Creek Timber (PCL)

FundFolio
Buy:       Matthews Pacific Tiger (MAPTX)
Sell:        T. Rowe price New Asia (PRASX)

Fund Finds Portfolio
Buy:       Celanese (CE)   

Fast Track Portfolio
Buy:                                            NVR (NVR)
Buy to close short position:        Electronic Arts (ERTS)