Q3 SCM Meeting

These all have major NEGATIVE impacts on capital markets – 1. Increased Regulation, 2. Deleveraging, 3. Move from Free Market to Socialistic European Society, 4. More Conservative Consumer

http://www.nytimes.com/interactive/2008/10/11/business/20081011_BEAR_MARKETS.html

This is a really scary market – most likely a big downturn – and important to stay out until for sure positive. Better to be a little late to the party coming up and catch 80% of the upside than get in too early and get hurt significantly.

2009 eatimate 101.90
2008 estimate 1100.00 75.94
2007 Core prelim 1468.36 82.54

Idea that the P/E multiples on the S&P right now are TOO HIGH. $946 of the S&P still might have ~30% to come down – depending on what the 1. true multiple these companies are going to be bought at and 2. What the actual earnings come in at. Look for Analyst to write down as the market goes down – not the other way around. If earnings fall to anywhere around 2003 levels of $40-60 a share, and multiples come back down, we still have significant opportunity for the S&P ending in that $500-800 range – that is scary.

’08 Will be lower than expected – but there is only really 1 bad earnings Q priced in. ’09 will have 4 bad quarters. Financials will have $0 earnings, Gas and Consumers are both big parts of the S&P as well – Oil prices are dropping and the Consumer will take on the attitude “cool to be thrifty.”
Oil Idea – Saudi’s will open the spigots – Oil down to $50 a barrel, make our energy independence much more difficult, PE and VC funds were unwilling to fund Green even when Oil was at $90 a barrel. Russia will continue to be hurt – 40% of their market is oil.

*Note on GOOG – despite my and market analysts feelings of where it should be ($600-800), it is now TOO big to sustain the large growth rate. Advertising will be crushed when companies cut back on spending. They may have 80% of the market, but remember analysts like JDSU at $90, 60, 30, 5; like YAHOO at $75, 40, 20…; the only reason Apple was able to make that big run was because they reinvented themselves – also opened individual Apple Stores which changed the way they distributed.

On an even more depressing note – if you bought a 10 year bond in 2000, your returns would be 1. Positive, and 2. 7-10% higher what equities have returned since then

Brazil is shut down as an economy for the next 2 years

China will go from 11% GDP to 8% - tied to us, if we don’t consume there, they are in big trouble

Obama will win the election – sectors hurt from this – Healthcare, Consumer
With his taxes – small business taxes go from 40-60%, $250k+ earners move from 40%-50%. Upper mid class and upper class are where gov’t makes the most of its tax income. After getting taxed in ’09 -> vote in Republican congress (just like when Clinton was in office) -> Gridlock -> nothing will get accomplished => where that leaves us: more taxes without anything to show for it

What are the companies looking to benefit if we start developing Nuclear power?

Look for companies to lower guidance for EST in Q4 and beyond – also report early

Estimates for bad loans are understated -> recession will continue to make more bad loans (negative feedback loop)

Financials will be heavily regulated – gone are the days of old/days of super leverage -> back to the 50s where leverage is considered bad/dangerous -> housing prices come down -> financials will hide earnings forever an sell for 9x earnings

Real Estate opportunities -> people that can afford to buy land/rental property without taking financing can pick up a lot of good potential real assets

Strongest Sectors to be in: Consumer Staples, Pharma, CASH

Some quick money opportunities (for Christmas money):
C – 4 times has hit 52 week lows -> proceeded by 50% pop in the stock
Genentech – look for this deal to close by the end of the deal – should get the price they are asking for as well

For the next 2+ years we could be in a very volatile and sideways market. During that time it is a great stock picker market. Look for great selection of companies in the best position to create new markets or take new market share depending on what rules and regulations are imposed.