What to do from a bearish sentiment to a bullish sentiment
Interview: Kuhn Capital Partners---Kuhn, Greg---President
>> u.s. factory orders unexpectedly rose in may, and the commerce department says its bookings rose 4/10 of 1% after a 3% decline in april. economists surveyed were expecting orders to be unchanged. now, excluding transportation, orders jumped 8/10 of 1 percent, the fourth increase in six months of the government figures showed demand thened for strim machinery and petroleum products. economists said factory orders may be starting to rebound in the aftermath of the iraq war. and california may have its credit rating cut by standard & poor’s. that’s because there has been no progress in passing a budget there. add to that, there are concerns about chronic deficits in the future. california already has the lowest debt rating among u.s. states. s&p issued a negative credit watch on $33.5 billion in debt backed by california’s operating budget. that’s a sign that the state’s a rating may fall. credit watch is a 90 day times horizon. factors that could trigg ear downgrade include depleted cash reserves, a lengthy delay in approving a spending plan or passing of a budget seriously out of whack. lawmakers are deadlocked on how to close the deficit for the new fiscal year that began yesterday. connecticut was cut one level to a 3 today, that was moody’s doing the cut there. this is a reflection of declining revenues in connecticut.
>> well, he was bearish for more than two years. now he is bullish to buy stocks that are near highs with rising volume and are leaders in their industries. joining us with his investment strategy is greg kuhn, a hedge fund manager and president of hun capital management. you brought show and tell for us. we are talking about what to do from a bearish sentiment to a bullish sentiment.
>> one main key factor was the breadth of the rally we’ve had since march. any of the rallies we had during the bear market were not broadly based in terms of their participation. this one has been. and historically when you’ve had such participation by broad -- many of the stocks in the new york stock exchange and over the counsel counterthat’s always bowedded well for higher prices down the line.
>> down the line always becomes a big question. how far down the line are we talking about? you are saying it’s pulled in and supporting the rally.
>> the next six to 12 months, there is a ton of cash in money market accounts. if you look at money market assets as a percentage of the wilshire 5000. it’s about 26% of that value of that index right now. now, just to put that in historical context, that is the highest level since 1982, which was the beginning of a secular bull market. i don’t think we are going to get that now, simply because absolute valuations are still very high. but the money will eventually come in over the next six to 12 months because the relative valuations are actually very good. meaning that equity prices relative to where interest rates are right now still look very attractive. people will continue to pay up for earnings, provided that they has very little competition for their money.
>> so even with the s&p p.e. at 32 or thereabouts, historical highs --
>> if you looked at the so-called federal reserve valuation model, which actually looks ahead at earnings over the next 12 months, earnings estimates and incorporates in the 10-year treasury note, it shows the best case scenario of the s&p 500 is actually 40% undervalued according to this model. if you use today worst earnings estimate every the next 12 months of $33 in the s&p 500, it’s showing that the market is fairly valued. that’s a moving target. because once treasury yields start backing up and they are starting to do that a little bit that whole picture changes. so for now it’s positive.
>> certainly contentious. you decided that, i know that. let’s talk a little about what set you thinking.
>> the last time i was on here back in march, one of the things i pointed out was looking at from a technical perspective on the s&p 500, there was major technical resistance around the 965 level. that was the lowthat we achieved in september of 2001. we eventually broke below that in spring and summer of last year. let’s show our viewers what we are talking about. we have the s&p 500 up on the bloomberg terminal between us. the low point you are referencing is back here, back in 1991.
>> right.
>> walk us through the rest of it.
>> so if you just drew that line straight across --
>> i’m going to try.
>> you have a real demarcation point. from that, september 2001 straight across, you hit right there, that’s the gust 2002 high then into the fall of last year as well. actually winter, january. so you bumped up against that three times.
>> look where we are now.
>> now you’ve broken above that level. that’s brought in some cash from the sidelines. now we need to do the technical resistance turned into support. when the s&p 500 sold off to around 9, 9,0672 level and reversed. so it looks like money wants to still come in at that level. that’s very positive.
>> we’ll have to check back with you and see if that happens. we are out of time so we won’t get to your stock picks. we’ll do that next time.
>> greg kuhn, president kuhn capital markets. we have to take a break, of course. in the midst of fending off a hostile takeover, peoplesoft reports a higher second quarter profit and sales forecast.
