Get Out and Stay Out -- of the Market!

After the market's stumble, now might be a good time to scoop up some bargains -- but only for the short term. More bad times could be headed toward Wall Street.

Right now, the Dow and S&P 500 are down 2% year to date, but corporate earnings are up. According to Thomson Reuters, 80% of companies in the S&P 500 handily beat consensus first-quarter estimates by analysts who were already bullish, and Wall Street's predicting better growth ahead. Alcoa (NYSE: AA  ) is expected to grow earnings 183% this year, while Caterpillar (NYSE: CAT  ) is expected to be up 45%.

As we've been schooled, a stock's price follows its earnings. Analysts predict that companies in the S&P 500 will grow profits by 33% on average in 2010, a much rosier outlook compared to the 9% drop they were forecasting back in January. And with those same companies trading at less than 13 times estimates -- below the historical average of 15 times -- this certainly looks like a buying opportunity.

Look at the performances of several top companies:

Company

Last Qtr.

EPS Surprise

FY10 EPS Growth Est.

% Below 52-Week High

Alcoa

11%

183%

(35%)

Bank of America (NYSE: BAC  )

211%

NC

(21%)

Ford (NYSE: F  )

48%

NC

(22%)

Intel (Nasdaq: INTC  )

13%

144%

(15%)

Caterpillar

28%

45%

(17%)

Source: Yahoo! Finance; NC = not calculable; Ford's 2009 EPS = $0.00; 2010 EPS Est. = $1.27.

Since the market tends to look forward rather than backward, this looks like a buyer's market. But looks can be deceiving.

If you go a little bit further out to the first quarter of 2011, analysts are reining in their enthusiasm. Thomson Reuters says analysts are significantly cutting back their estimates, expecting earnings to grow by just 13% compared to their forecasts of 25% back in March. And full-year 2011 projections are about half of what they are for this year.

Don't walk away, run!
There's a whole bunch of stuff about to go wrong, leaving us likely poised on the brink of a double-dip recession. Consider some of these as signs of a new, worldwide calamity.

  • Job growth here at home has stagnated.
  • States like California, Nevada, and New York are also going on austerity diets, but the potential for default remains high.
  • Banks aren't lending to business, finding it cheaper -- and more profitable -- to lend to the U.S. government.
  • Greece's default was averted -- but only until its current set of loans come due.
  • Spain is wobbling and may be the next in line for a bailout.
  • Austerity budgets are being implemented all across Europe.
  • China's real estate bubble may have just burst.

There's more, too, but you get the picture. Suffice to say the prognosis for growth is dreary. However, the timing of the coming crash is difficult to predict.

Hoarding nuts for winter
According to the Federal Reserve, U.S. corporations are sitting atop a pile of cash and liquid assets larger than any previously recorded, with $1.84 trillion in the bank. If they release that money back into the market, it could have a profound effect on results. Right now, however, they prefer to squirrel it away.

Although I'm bearish about our immediate future, I'm ultimately a long-term bull. A decade to 15 years down the road, I see corporate earnings coming in at higher levels than where they stand today. Although it smacks of market timing, investors need to assess whether today's prices are a good value. Buying in now might still give you profits in the long term, but I think there will be greater profits made by using caution.

Intel is a Motley Fool Inside Value selection. Ford is a Motley Fool Stock Advisor recommendation. The Fool has created a covered strangle position on Intel. Motley Fool Options has recommended buying calls on Intel. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


Read/Post Comments (16) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 14, 2010, at 5:15 PM, gfbjohn wrote:

    Stagnant job growth is the most significant of the factors listed.

    Foreign financial trouble is, well, foreign. The world economy is interconnected so yes trouble in Greece, Spain, China etc. will trouble us, but not nearly as much so if our economy is solid. State governments on "austerity diets" mean there are more workers on the street. Banks lending to the US Govt means what gets produced is shifted to the US Govt. When interest rates finally kick back up to curb inflation, as they may well if rumblings from the Fed come to reality, the banks will find themselves on the other side of the who will bail out whom. What irony. But if the jobs pay the salaries that are the taxable income that gets the US out of debt, we're back to jobs, eh?

    So what's missing to get jobs up: demand. No demand because there are no jobs. Sounds like a catch 22, but only because we are looking at what is and not at what could be.

    Businesses produce based on market research, but all they see is what income is out there, and not what people would buy if they could. The key to getting us out of our mess is to think outside the box and find ways to induce businesses to address the real, complete aggregate demand just waiting to thrust us into a quantum leap higher economy, instead of the emaciated demand based on money in people's hands.

    When we know what in aggregate we really want, rather than what we can afford, it's just a matter of re-aligning our productive capacity to address that aggregate. It will mean we discover we want more butter and less guns. We will want better housing, education, infrastructure, cleaner energy, safer and more effective medicine for more diseases, better entertainment... or not... because we don't know what we want.

    Google (GOOG), Amazon (AMZN), Electronic Arts (ERTS), MicroStrategy (MSTR), RedHat (RHT)/Linux, SourceForge.net -- please help us find a holistic way to determine our real, monstrously huge demand!

  • Report this Comment On June 14, 2010, at 5:50 PM, scarver2 wrote:

    Headlines like "Don't walk away, run!" from an article that appears to be sponsored by TMF only tends to feed investor anxiety, particularly with novice investors, and serves a limited purpose. I am a subscriber to three TMF premium services and I have not seen any recommendations to exit holdings and hide cash for a better day. In fact, I have seen three or four buy recommendations in the last couple of days, causing run-ups in thinly traded stocks because of the absent of limit orders. So what gives? Why is TMF bent (sorry, no pun intended) on sending mixed signals??

    As stated in the earlier comment, I agree that job growth is definitely a missing ingredient. When (white and blue collar) jobs are scarce and many people actively seeking work are unable to find work, it is especially difficult to buy-buy-buy and get the economy moving. For years, corporate America has downsized and sent jobs overseas to chase earnings. Many large and smaller employers have too quickly reduced positions (dramatically reducing family incomes) rather than hours or pay rates (reducing family incomes for a broader base of employees but still providing work for families to pay bills), leaving many unable to pay the mortgage.

    Don't get me wrong, I want to see all of the companies I invest in achieve stellar earnings each and every year, but we have quite a hole to dig out of in the economic environment. Until the banks start lending, companies start hiring and growing ranks of employed workers start spending -- well, you get the point.

  • Report this Comment On June 14, 2010, at 6:18 PM, flash1939 wrote:

    I have been a subscriber for about 1 yr and either I'm not reading your evaluations of the market wrong or you are sending out mixed messages. Currently I'm out about $15,000 on the last pullback Are you saying take the loss and get out now??? My biggest investments are F and INTC. I know you cannot give specific recommendations how ever some insight would be greatly appreciated at this time! Waiting for some clarification regarding your 4:00 statement???? Isn't 4:00 a poor time for releasing this info as anyone reading the article and following it will drive the market down tommorow causing all your subscribers possible losses????

  • Report this Comment On June 14, 2010, at 6:50 PM, TMFCop wrote:

    scarver2 and flash1939,

    Opinions appearing in articles are solely those of the author and the Fool doesn't necessarily agree with those that are made -- whether it's to get out of the market or whether any particular stock looks good or not.

    That's one of the great benefits of the Motley Fool is that there is no "corporate line" that must be toed. If I think XYZ Corp is a lousy investment, I'm free to say so even if it's a recommendation made by one of the Fool's services. So long as a cogent argument can be made for or against a position, the Motley Fool gives its writers wide latitude in expressing their opinions.

    By having a variety of positions to choose from, pro and con, investors can make better decisions for themselves than if they only got one side of an argument.

    As regards to this particular article, yes, I'm particularly bearish about the economy and the stock market. It's my opinion that there are structural forces at work that are leading us down. As I said in the article, the exact timing is tough to predict and other influences -- such as the nearly $2 trillion in cash companies are sitting on -- can alter outcomes. But I'm very bearish nonetheless. Problems here at home coupled with events overseas has me thinking this could be a very real option.

    With that said, the article is just that...my opinion. Not that of the Motley Fool, its services, or its advisers. I'll admit, I'm probably more bearish than most others here at the Fool and another writer would be free to come on and write an article giving an opposite viewpoint.

    Again, that's the beauty of the Motley Fool: opposing opinions are entertained.

    So when you come to the Fool's website and see an article extolling the virtues of a particular company (or saying it's not a good buy at all), you shouldn't except that as gospel or as an endorsement by the Fool. They may agree with the sentiment made, or they might not. Either way, the opinion expressed is solely that of the writer, and that's the case here.

    Hope that helps clear things up for you.

    Rich

  • Report this Comment On June 14, 2010, at 8:37 PM, mysticmountainra wrote:

    RE: TMFCOP/RICH COMMENTS.....SORRY RICH....to most any reader of TMF, your "sensational story" appears to be a "legitimate" TMJ sponsored/written article whose purpose appears to sensationally impart a bearish TMJ sponsored sentiment! Your article is no better than the most blatant sensationalism garbage that anybody could post! TMJ is lax on their control as such comments as yours should clearly state in the MF "banner"..."These are comments from our readers and not opinions or positions espoused by TMJ".

    It is precisely for these reasons, I no longer (for pay) subscribe to TMJ. TMJ has for some time now, become nothing but a gossip column and I feel TMJ has lost their "moral compass". TMJ imparts such diverse, contradictory information and conclusions under the auspices of their official sites that one can not easily even determine what the heck it is that they're saying or what real investment information they are trying to impart. What was once a genuinely helpful investment "tool" has now become nothing but the lowest common denominator of financial gossip and investment pandering and I guess all done in the name of TMF profits! In my opinion, readers should take with a grain of salt, whatever they read on TMF! Dave

  • Report this Comment On June 14, 2010, at 10:41 PM, upndown100 wrote:

    I find myself agreeing with Dave (mysticmountainra) on this one. A tempered "free for all" discussion among subscribers is one thing, but a brief provocative statement appearing to have the weight of TMF behind it is another. TMF needs to take much greater care in reflecting on the broad economic forces and trends and support statements with more in depth analysis and factual information- and do a better job at reconciling it's own divergent recommendations/advice. The current volatility of the market is enough to generate stress and health issues without he appearance of TMF adding to the hype and confusion. I expect more and better from TMF and am re-thinking my own subscription. Al

  • Report this Comment On June 14, 2010, at 10:57 PM, xetn wrote:

    gfbjohn

    Foreign debt is not just foreign, the IMF put up a lot of that money to bail out Greece and 17% of that was from the US taxpayers.

    Job creation is not dependent on demand!. Consumption does not make an economy run. You cannot consume what has not been produced. Jobs are a created by a need to produce, not because of consumption. So, what drives production? Production is a result of saving and investment, which is part of capital creation (the means of production). As of now, the government is taking a lot of the productive capital out of the private sector and at the same time, creating an atmosphere of uncertainty in the private sector over pending legislation (regulations) and taxes.

    By the way, saving and investing are two sides of the same coin.

    Consumption driven by government spending which adds nothing productive to the economy just drives up (or helps prop up) prices. Government cannot spend unless it first steals from the citizens or prints money out of thin air or issues debt by borrowing from Japan or China etc.

  • Report this Comment On June 15, 2010, at 2:23 AM, joandrose wrote:

    TMF

    " a decade to fifteen years down the road I see corporate earnings coming in higher " - WOW, is that the best you can do ?

    I am pretty certain VERY few investors are really making day to day investing decisions on what may be happening in 15 years time .

    Far too many variables exist for such comments to have any meaningful relevence.

    Personally I believe 1 to 5 years horizon is as far as is worth while . Beyond that it's pure guess work in the 21st century

  • Report this Comment On June 15, 2010, at 4:43 AM, sonrisa1 wrote:

    From a moral point of view you should not invest in Caterpillar as they sell war machinery to the Israelis for suppression of the citizens of Palestine & various large stock holders are no getting out as their equipment has & is being used to kill & subdue innocents by the IDF(of course I do not condone some actions of Hamas), environemental destruction is also caused by use of their machines in the USA & elsewhere

  • Report this Comment On June 15, 2010, at 5:28 AM, cordwood wrote:

    WOW, soni .Sure am relieved that you" do not condone some actions of Hamas".

    Tell ya what...Contact the news networks maybe they will stage a "Tinamman Square" event for you obstructing Caterpillar equipment to prevent "environemental destruction".

    Most of their eqpt. has a crank IN it...ya 'all can be the crank in front of it !!

  • Report this Comment On June 15, 2010, at 8:17 AM, sept2749 wrote:

    Mixed messages! Ditto !

  • Report this Comment On June 15, 2010, at 2:39 PM, Notfooled1 wrote:

    I was about to sell everything when I read this TMF article. Since the FOOL is almost always wrong, I will instead hold everything and commit my remaining reserves to the market.

  • Report this Comment On June 18, 2010, at 7:12 PM, philkek wrote:

    Thanks fellow fools. Some of you made me laugh and some of you made me cry. ALL of you have got me thinking about more homework before buying, selling, or holding ANY investments. TMF says watch the fundamentals close. Then decide. Buy domestic or foreign. 1 year or 15 years as YOU the fool investor decide what is best. Take gains for calculated risks. Smarter fools lead on while slower fools like me follow all the way to the bank. Good symbols here to Fool with. Are YOU rich yet ? haha

  • Report this Comment On June 18, 2010, at 7:56 PM, daveandrae wrote:

    I just looked at the annualized return of my own portfolio, which is 100% equity, 0% cash.

    McDonalds - 21.81%

    Dow Chemical - 67.39%

    General Electric - 30.20%

    Harley Davidson- 62.48%

    Pfizer - 4.32%

    turnover ratio - 0%

    Total return before dividends - 37.24%

    S&P 500 - 23%

    Wanna know what was being written on this site, at this time, last year? ... "Is Buy and hold investing dead?" Look up the article for yourselves.

    No serious long term investor takes this crap seriously.

    "Wall street makes its money on activity. You make your money on inactivity"...Warren Buffett.

    Buy equities- HOLD equities. The first part is easy. The second part is very difficult.

    Thomas Edmonds

  • Report this Comment On June 19, 2010, at 5:05 PM, GrumpyGopher wrote:

    I'm also bearish near term and have been adding cash for my next acquisition run. But have purchased SO & WNR recently. I'm in Big Oil and haven't seen where we are moving forward on money making projects, only environmental mandates. Still many people out of work, and not many openings.

  • Report this Comment On June 20, 2010, at 11:54 AM, Agressive13 wrote:

    Look at the coming taxes in 2011...President Bush's Tax rates expire!!!!!!!!

    capital gains from 15% to 20%

    estates tax 0-55%

    personal income 35%- 39.6%

    dividend tax rates?? 15%- 39.6%!!!

    go Sub-S, pay your own salary if your in the top rate lol avoid medicaid taxes on your entire generated income...

    companies, like the airlines, will produce massive profits this year to avoid paying the tax increase in 2011. It's simple market theory and I think Rich has an outstanding theory. A theory is also backed by the June 7th issue of the Wall Street Journal.

    As for me I will hide all my unrealized capital gains into a ROTH IRA at the end of the year. Watch the market tumble first and second quarter 2011.

    RUN FROM THE MARKET! Use an exit strategy though.

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