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Premium member Presentation Transcript Peter Ricchiuti: Peter Ricchiuti Assistant Dean & Director of ResearchSlide2: Peter Ricchiuti Assistant Dean & Director of Research BURKENROAD REPORTS Tulane University Ph: (504) 862-8489 Fax (504) 865-5430 Peter.Ricchiuti@Tulane.edu www.burkenroad.org MARKET SIGNALS Peter Ricchiuti is not affiliated with TD AMERITRADE and the views expressed herein are his own. Disclaimer: Disclaimer THE MATERIAL COVERED IN THIS PRESENTATION IS THE OPINION OF THE PRESENTER AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO BUY OR SELL ANY OF THE SECURITIES MENTIONED. INVESTORS SHOULD SEEK THE COUNSEL OF THEIR FINANCIAL ADVISOR BEFORE MAKING ANY KIND OF INVESTMENT. THE PRESENTER MAY OR MAY NOT HOLD LONG OR SHORT POSITIONS IN ANY OF THE SECURITIES MENTIONED. www.burkenroad.orgSlide4: Dart vs. Professional Stock Pickers Slide5: Oil Often Overlooked Oil Oil Wells www.burkenroad.orgDreco Energy Services Price Graph: Dreco Energy Services Price Graph 31 May 26June 26th July 23rd Aug 20th Sept. 19th Oct. 15th Nov 29Nov www.burkenroad.org For illustrative purpose only. Not a recommendation. Celebrity Stock Picks – Beat Mike: Celebrity Stock Picks – Beat Mike www.burkenroad.orgSINCE WORLD WAR II: SINCE WORLD WAR II We’ve had 9 Recessions l 21 stock declines of 10% or greater l 8 stock declines of 20% or greater What Counts is Corporate Earnings Since WW II l Corporate profits up 63 fold l Stock prices have risen 71 fold HANG IN THERE: HANG IN THERE Over the past 30 years the stock market has produced an average annual rate of return just under 11%. If you were out of the market during the best 30 months your return would drop to just 3%. Sources of Long-Term Performance: Sources of Long-Term Performance WINTER WONDERLAND: WINTER WONDERLAND Cold Weather: November - April Warm Weather: May – October Average returns from January 1970 through August 1998 Source: “The Halloween Indicator” by Sven Bouman and Ben JacobsenSlide12: Relevant Economic/Financial Issues Energy Issues Deficits Interest Rates Domestic Politics Valuation Levels Inflation International Investing Demographics LaborDeficits: Deficits Budget Deficit Trade Deficit Weak Dollar ENERGY ISSUES: ENERGY ISSUES Oil & Gas Prices will remain stubbornly high Demand Strong – Especially China and India Supply Weak – Increasing reserve “decline rates” Shortage of new prospects New Refineries?: New Refineries? - NIMBY - BANANA - NOPESlide16: Interest Rates 09/01/00 3 month 6.00% 10 year 5.70% Slope -30 basis points Predicting a sharp decline in corporate earnings. 07/01/03 3 month 0.95% 10 year 4.35% Slope +340 basis points Predicting a huge increase in corporate earnings growth 03/15/05 3 month 2.75% 10 year 4.25% Slope +150 Predicting a relative slowdown in corporate earnings growth. 04/06/06 3 month 4. 70% 10 year 4.90% Slope 20 Is the curve going to invert again, what would this mean? Slide17: Domestic Politics The first year of a presidential term is usually worst for stocks. Ranking Third year is best Fourth year is second best Second year is third best FEDERAL RESERVE Valuation Model: FEDERAL RESERVE Valuation Model = = *Trailing 12 month EPS. 04/06/06 $72.00* 1300.00 EPS for S&P 500 Price of the S&P 500 Yield on 10 Year Treasury Note 5.50 %RIGHTING THE SHIP: RIGHTING THE SHIP Earnings are lower than expected. Interest rates rise Stock prices increase Some combination of the above? FEDERAL RESERVE Valuation Model: FEDERAL RESERVE Valuation Model = = *Forecasted 12 month EPS. 03/01/06 $78.00* 1285.00 6.00% Expected EPS for S&P 500 Price of the S&P 500 Yield on 10 Year Treasury Note A year from now…who knows?Inflation vs. Deflation: Inflation vs. Deflation Those industries making significant gains in productivity are the ones seeing deflationary pressures. Consumers are getting more for less. Examples: Dell, Toyota and Wal-Mart In 1979 it took GM 41 hours to make a car. Today it takes just 24 hours. For illustrative purpose only. Not a recommendation. Inflation vs. Deflation: Inflation vs. Deflation Those industries that are labor intensive have made very little progress in productivity and prices for these keep rising. Consumers are getting the same for more. Examples: Tulane University, Boston Red Sox and Boudreaux’s Auto Repair. In 1788 it took five musicians to play a piece by Mozart (two violinists, two violists, and a cellist) …and it still does.Today’s Public Companies: Today’s Public Companies Clean Balance Sheets Lots of Cash Share Buybacks Increased Dividends Mergers and Acquisitions Public Companies Going PrivateGoing Abroad: PROS and CONS: Going Abroad: PROS and CONS International Investing Disadvantages Currency risks Political risks Lack of information Differences in accounting practices High transaction costs Foreign taxes Advantages - profit from growing free market capitalism around the world - tidal wave of pension money into international securities less efficient markets and undiscovered opportunities the U.S. dollar has been quite weak over the past few years - lower overall riskINVESTING DEMOGRAPHICS: INVESTING DEMOGRAPHICS “The Pig and the Python” Very high birth rates from 1946 – 1964 Investing Concepts - Financial Services - Healthcare - Leisure A Labor P/E: A Labor P/E Unit Labor Costs ____________________ After – Tax Unit ProfitsCHEAP LABOR;NEW JOB GROWTH?: CHEAP LABOR;NEW JOB GROWTH? Source: National Income & Products AccountsRISK vs. RETURN: RISK vs. RETURN STOCKS PE (next 12 months) PEG Popular Large Caps 20.9x 8.9% 2.34x Overlooked Small Cap Value Craftmade International 14.8x 24.7% 0.60x Estimated Growth Rate Coca-Cola 07/15/05 For illustrative purpose only. Not a recommendation. ANOTHER WAY TO LOOK AT IT: ANOTHER WAY TO LOOK AT IT Stocks Enterprise Value/EBITDA Popular Large Caps Coca-Cola 14.3x Overlooked Small Cap Value Craftmade International 7.6x 07/15/05 For illustrative purpose only. Not a recommendation. WHAT DRIVES A STOCK?: WHAT DRIVES A STOCK? Price Earnings Per Share = P/E ratio Using Home Depot for Example: $42.00 $2.74 = 15.3x 3/01/06 For illustrative purpose only. Not a recommendation. Slide32: For illustrative purpose only. Not a recommendation. A Look At Wal-Mart StockP/E’s vs. Earnings Per Share Over Time : A Look At Wal-Mart Stock P/E’s vs. Earnings Per Share Over Time 12/04 $54.00 = A PE of 23.3x $ 2.32 12/02 $52.00 = A PE of 29.4x $ 1.77 12/00 $53.00 = A PE of 44.2x $ 1.20 The stock has remained flat as EPS growth has mirrored the decline in its PE ratio. For illustrative purpose only. Not a recommendation. …got losses?: …got losses? Indexes (3/10/00 through 3/28/03) Nasdaq 100 -76% S&P 500 -35% Value Line 0% Slide35: THREE STAGES OF A BEAR MARKETIt’s Not A Stock Market…It’s a Market of Stocks: It’s Not A Stock Market… It’s a Market of StocksOH, THOSE CYCLES: OH, THOSE CYCLES Early 1970’s: Nifty Fifty Early 1980’s: Oil Late 1980’s: Japan Early 1990’s: Emerging Markets Mid 1990’s: Large Cap Growth Late 1990’s: High Technology Early 2000’s: Real Estate Each bubble has ended in significant under- performance for a long period of time!Slide38: PEHOUSING INDEX: HOUSING INDEX *EXAMPLE Average Median Home Price Average Annual Income 1994 - 2.4x 2004 - 2.8x *New Orleans Slide41: Other Factors - Lack of Liquidity - Enormous LeverageIMPORTANT ISSUES: IMPORTANT ISSUES Favorable Demographics Recently Lackluster Investor Performance Changes to Pension PlansGREAT READING ON THE SUBJECT OF INVESTMENTS : GREAT READING ON THE SUBJECT OF INVESTMENTS Popular Books One Up On Wall Street, Peter Lynch (Simon & Schuster) A Zebra in Lion Country, Ralph Wanger (Simon & Schuster) The Money Masters, John Train (Harper & Row) Analytical Books The Intelligent Investor, Benjamin Graham (Harper & Row) Security Analysis, Benjamin Graham (McGraw-Hill) Sophisticated and Well Written Common Stocks and Uncommon Profits, Phillip A. Fisher (Harper & Row) The Contrarian Investment Strategy, David Dremen (Random House) Oldies but Goodies Reminiscences of a Stock Operator, Edwin Lefevre (George H. Doran) Extraordinary Popular Delusions & the Madness of Crowds, Charles MacKay (L. C. Page & Co.) www.burkenroad.org: www.burkenroad.org Slide45: For Advisor use only. May not be used with the public. TD AMERITRADE Institutional, Division of TD AMERITRADE, Inc., member NASD/SIPC. TD AMERITRADE is a trademark jointly owned by TD AMERITRADE IP Company, Inc. and The Toronto-Dominion Bank. © 2006 TD AMERITRADE IP Company, Inc. All rights reserved. Used with permission. You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.