Four True Facts about Stocks We Must Now Face

Feb 24 13:42 2009 Michael Lombardi Print This Article


After playing nice with its November 2007 low,Guest Posting the bear came out yesterday, sending the Dow Jones Industrial Average to its lowest level in five years.

I receive most of the financial reports and forecasts written by my contemporaries in this business. And I could not believe what I was reading last night on some of their sites. The pessimism out there is outright daunting. I'm reading everything from renewed forecasts of another Great Depression to Dow Jones 3,000 (it closed last night at 7,465).

The Dow Jones Industrial Average is the world's most widely followed stock market index, representing the stock price action of 30 of the largest companies in the world. While we continue to read and hear bad news daily, I do not want my readers to panic. I want them to be logical, not emotional, remembering the opportunities that always present themselves in difficult times. Make other peoples' problems your opportunities.

Below, please find a list of four true facts we must face about stocks:

Fact #1: After years of economic growth, the largest companies in the world are seeing their sales and earnings contract. This means that overhead, especially employees, is being cut. Today, the Dow Jones Industrial Average sells at 18.5 times earnings. The Dow is historically a bargain when stocks sell at nine to 10 times earnings. That means the Dow would have to fall to 4,000 to be a bargain -- a 46% drop from here.

Fact #2: The dividend yield on the Dow today stands at four percent. Historically, bear markets have ended when the yield on the Dow has hit six percent. Hence, the Dow would have to 5,000 to be a bargain -- a 33% drop from here.

Fact #3: This is a big one. Interest rates have never been so low. Throughout history, stocks have traded in direct relation to interest rates. At a dividend yield of six percent, compared to a current two-year U.S. T-bill paying less than two percent, stocks would be a screaming buy.

Fact #4: The Dow Jones Industrial Average is only an index of the largest companies -- the ones that got too big and too inefficient in the first place. The Dow does not represent the general stock market. The Russell 2000 Index (a broader index of small-cap stocks) has not broken down to a new low. It is holding its own. There are already a great number of quality small-cap stocks selling below 10 times earnings. Finally, and as proof that the Dow is not representative of the entire stock market, last year the Dow lost 35% of its value. At the same time, our top 19 picks for 2008, mostly small-cap stocks, rose an average 136.39% (www.profitconfidential.com).

With each stock market move lower, greater stock market bargains are presenting themselves.

Profit Confidential

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About Article Author

Michael Lombardi
Michael Lombardi

Michael Lombardi, CFP, MBA, bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely,  taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management.

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