Challenges to “15 by 15”
Alan Brochstein
August 1, 2009
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What Kind of Recovery?
W U
V L
J
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Typically, a “U” or a “V”StockVal®
77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
GROSS DOMESTIC PRODUCT-REAL ($BIL) YTY % CHANGE-2
-1
0
1
2
3
4
5
6
7
8
HI 8.5 LO -2.7 ME 3.1 CU -2.5
09-30-197903-31-2009
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GDP – The Long ViewStockVal®
45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
GROSS DOMESTIC PRODUCT ($BIL)200
500
1500
5000
14500 HI 14412.8 LO 244.6 ME 2275.6 CU 14097.2 GR 6.8%
09-30-194703-31-2009
GROSS DOMESTIC PRODUCT ($BIL) YTY % CHANGE-6
0
6
12
18HI 19.5 LO -3.6 ME 6.4 CU -0.4
03-31-194803-31-2009
GROSS DOMESTIC PRODUCT-REAL ($BIL)1000
20003000
6000
12000 HI 11727.4 LO 1568.0 ME 5021.0 CU 11360.5 GR 3.3%
09-30-194703-31-2009
GROSS DOMESTIC PRODUCT-REAL ($BIL) YTY % CHANGE-4
0
4
8
12HI 13.4 LO -3.0 ME 3.3 CU -2.5
03-31-194803-31-2009
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The Case for “L”
• This time is different (careful!)
• Deleveraging will continue– Consumers– Banks/REITs/Corporations– Eventually Government (Taxes)
• Exports and deficit spending could offset
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Unemployment: Here to StayStockVal®
45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
UNEMPLOYMENT RATE,SA (%)0
3
6
9
12HI 10.80 LO 2.50 ME 5.50 CU 9.50 GR 1.7%
01-31-194806-30-2009
UNEMPLOYMENT DURATION-WEEKS,SA6
8
12
18
26HI 24.50 LO 7.10 ME 13.45 CU 24.50 GR 1.7%
01-31-194806-30-2009
EARNINGS-AVERAGE HOURLY,SA ($) YTY % CHANGE0
3
6
9HI 9.4 LO 1.5 ME 3.9 CU 2.7
01-31-196506-30-2009
MFG WORKERS-AVG WEEKLY HOURS,SA36
38
40
42HI 42.00 LO 37.30 ME 40.60 CU 39.50 GR 0.0%
07-31-194706-30-2009
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Consumer Spending: Rare DeclineStockVal®
58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
GROSS DOMESTIC PRODUCT ($BIL) YTY % CHANGE0
3
6
9
12
15
HI 14.6 LO -0.4 ME 6.5 CU -0.4
09-30-195903-31-2009
PERSONAL INCOME,SAAR ($BIL) YTY % CHANGE0
3
6
9
12
15
HI 14.3 LO 0.1 ME 6.9 CU 0.3
01-31-196005-31-2009
PERSONAL CONSUMPTION EXP,SAAR ($BIL) YTY % CHANGE0
3
6
9
12
15
HI 13.6 LO -1.8 ME 6.9 CU -1.8
01-31-196005-31-2009
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Housing: Bust to Boom?StockVal®
58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
HOUSING STARTS,SAAR (TH)0
625
1250
1875
2500 HI 2494.0 LO 479.0 ME 1517.0 CU 582.0 GR -1.9%
07-31-195906-30-2009
HOUSING STARTS,SAAR (TH) YTY % CHANGE-60
-30
0
30
60HI 96.2 LO -54.9 ME 0.0 CU -46.0
07-31-195906-30-2009
NEW ONE FAMILY HOMES SOLD,SAAR (TH)300
400
600
1000
1400HI 1389.00 LO 329.00 ME 652.00 CU 384.00 GR -0.9%
01-31-196306-30-2009
NEW ONE FAMILY HOMES SOLD,SAAR (TH) YTY % CHANGE-60
-30
0
30
60HI 88.2 LO -50.5 ME 1.0 CU -21.3
01-31-196406-30-2009
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New Cycle of Saving?StockVal®
50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
PERSONAL SAVINGS RATE (%)-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
HI 12.50 LO -0.70 ME 8.00 CU 4.30 GR -0.3%
09-30-195103-31-2009
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Money Supply: Liquidity AboundsStockVal®
77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
M2 MONEY SUPPLY,SA ($BIL)1500
1800
2200
2700
3200
3900
4700
5700
6900
8400
HI 8385.4 LO 1596.6 ME 3506.1 CU 8354.2 GR 6.0%
01-09-198107-17-2009
M2 MONEY SUPPLY,SA ($BIL) YTY % CHANGE0
2
4
6
8
10
12
HI 13.0 LO 0.1 ME 5.8 CU 8.7
01-08-198207-17-2009
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Government Getting SqueezedStockVal®
45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
FEDERAL GOVT EXPENDITURES ($BIL)30
100
300
1000
3300 HI 3205.8 LO 35.8 ME 442.6 CU 3205.8 GR 7.4%
09-30-194703-31-2009
FEDERAL GOVT RECEIPTS ($BIL)30
100
300
900
2700 HI 2679.2 LO 36.2 ME 417.1 CU 2377.6 GR 6.8%
09-30-194703-31-2009
FEDERAL GOVT EXPENDITURES ($BIL) YTY % CHANGE-8
0
8
16
24HI 44.9 LO -12.8 ME 6.8 CU 6.7
03-31-194803-31-2009
FEDERAL GOVT RECEIPTS ($BIL) YTY % CHANGE-20
0
20
40HI 56.1 LO -12.6 ME 7.3 CU -11.0
03-31-194803-31-2009
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Will Interest Rates Stay Low?StockVal®
50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
FEDERAL GOVT BUDGET DEFICIT ($BIL)-834
-714
-595
-476
-357
-238
-119
0
119
238
HI 212.70 LO -828.20 ME -30.60 CU -828.20 GR NMN
09-30-195103-31-2009
US TREASURY BOND 10 YR (%)2
3
4
6
8
11
16
HI 15.68 LO 2.13 ME 6.52 CU 3.70 GR -0.2%
01-05-196207-24-2009
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Exports: Recovery LikelyStockVal®
73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
EXPORTS-TOTAL ($BIL) YTY % CHANGE-16
-8
0
8
16
24
32
HI 34.0 LO -22.1 ME 9.2 CU -22.1
09-30-197403-31-2009
EXPORTS-GOODS ($BIL) YTY % CHANGE-16
-8
0
8
16
24
32
HI 36.1 LO -21.0 ME 7.9 CU -21.0
09-30-197403-31-2009
EXPORTS-SERVICES ($BIL) YTY % CHANGE-6
0
6
12
18
24
30
HI 26.2 LO -11.3 ME 10.6 CU -7.2
09-30-197403-31-2009
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Stocks Rebound from Hell
• 666 intraday low represented 49% y-o-y decline
• 50% rally leaves stocks down 20% y-o-y
2006 2007 2008 2009
S&P 500 INDEX WITH REPORTED EPS (SP5)PRICE 982.18 DATE 07-27-2009PRICE 982.18 DATE 07-27-2009StockVal®
660660
720720760760
820820
880880
960960
10201020
11001100
12001200
12801280
13801380
14801480
1600
1720
1860
50
150
PRICE / SALES0.60.6
0.80.8
1.01.0
1.21.2
1.41.4
1.61.6
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Stocks: The Long ViewStockVal®
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22
S&P 500 INDEX4
8
16
28
56
112
216
424
824
1600
HI 1561.80 LO 4.41 ME 90.60 CU 979.26 GR 4.5%
07-19-192907-24-2009
S&P 500 INDEX YTY % CHANGE-44
-33
-22
-11
0
11
22
33
44
55
HI 100.0 +LO -70.0 ME 7.9 CU -22.1
07-19-192907-24-2009
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Valuing Stocks
• Key elements – Interest Rates and Earnings
• Interest Rates: Corporate Bonds not Treasuries
• Earnings: Sales & Margins
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Treasuries Low, Spreads HighStockVal®
58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
SPREAD-CORP BAA / US T-BOND 10 YR0
2
4
6
8
HI 6.19 LO 0.17 ME 1.82 CU 3.41 GR 2.4%
01-05-196207-24-2009
SPREAD-HI YIELD CORP / US T-BOND 10 YR0
4
8
12
16
20
HI 19.89 LO 2.32 ME 4.73 CU 8.63 GR 9.0%
01-03-199707-24-2009
US TREASURY BOND 10 YR (%)2
3
4
6
8
11
16
HI 15.68 LO 2.13 ME 6.52 CU 3.70 GR -0.2%
01-05-196207-24-2009
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Margins Depressed, Valuations Fair
StockVal®S&P 500 INDEX WITH OPERATING EPS (SPX) Price 982.181993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
PRE-TAX MARGIN %3
6
9
12
15HI 13.0 LO 4.3 ME 10.3 CU 4.3
09-30-199412-31-2008
ENTERPRISE VALUE/SALES1.0
1.5
2.0
2.5
3.0HI 2.9 LO 1.2 ME 2.1 CU 1.4
07-22-199407-27-2009
ENTERPRISE VALUE/EBITDA6
9
12
15HI 14.6 LO 7.6 ME 11.1 CU 11.1
07-22-199407-27-2009
PRICE / YR-FORWARD EPS ESTS10
15
20
25
30HI 27.1 LO 10.4 ME 16.4 CU 15.7
12-03-199907-27-2009
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Dow 15K in 2015
• 10% annual return
• Will require earnings growth– Revenues?– Margins?
• Headwinds:– Rates won’t help– Dilution from deleveraging
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Stacking the Deck
• Go Conservative Financials– Avoid Dilution– Avoid Higher Interest Expense– Avoid Double-Dip Dunk
• Go Small– Nimble– Better Balance Sheets
• Go Overseas
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Example
• National Instruments
• $2bln market cap
• $250mm cash/no debt
• Well managed• Growing International
• Downside Protection
SHOULD THE PE BE “HIGH” OR “LOW”?
StockVal®NATIONAL INSTRUMENTS CORP (NATI) Price 26.231999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20101999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
PRICE10
15
20
30
40HI 38LO 13ME 27CU 26GR 2.7%
07-23-199907-27-2009
NET PROFIT MARGIN ADJUSTED %6
9
12
15HI 14.1 LO 6.5 ME 10.5 CU 6.5
09-30-199906-30-2009
PRICE / SALES0
3
6
9HI 8.54 LO 1.59 ME 4.35 CU 2.83
07-23-199907-27-2009
PRICE / YR-FORWARD EPS ESTS10
20
30
40
50HI 50.0 LO 13.4 ME 31.6 CU 37.6
07-23-199907-27-2009
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Conclusions
• Economy likely to remain challenging (L)
• Good things in small packages
• Financial leverage is ugly
• Focus on companies exposed to exports
• Bonds may offer more value than Stocks
• Buy and Hold won’t likely work