China Bounces 3.5%, Goldman Optimistic on Equities

Monday, May 24, 2010

Distinguished financial academic and Nobel Laureate, Robert Merton, ran a poll of his audience at his financial seminars over 25 years ago. He asked his crowd to consider the following strategies: 1) Bond Investor: Invest $1,000 into Treasury Bills on January 1, 1927 and hold for 52 years until December 31, 1978 resulting in investment growth to $3,600. 2) Stock Market Investor: Invest $1,000 into the NYSE Index on January 1, 1927 and hold for 52 years until December 31, 1978 resulting in investment growth to $67,500. 3) Perfect Market Timer: Say you can perfectly time the market on a month-to-month basis. You know at the beginning of each month whether or not the stock market will outperform T-Bills that month and you shift your portfolio back and forth every month accordingly. What is your return? Beginning with $1,000 a perfect market timer would end up with a whopping $5.38 billion representing a 537,999,900% return after 52 years. This level of return highlights the incredible power of compounding...especially when you never lose. Achieving just a sliver of success in market timing can generate substantial returns.

The European debt crisis has been quite the gain for US home buyers. The EU debt troubles quickly came to the surface at a time when worries over rising rates were beginning to fester. The flight to safety has worked to depress rates to almost 50-year lows. Rates are now 4.86% far lower than the 6% many economists had predicted. (WSJ)

Despite the recent sell-off, Goldman Sachs is still bullish: "Developments over the past two weeks have not altered our fundamental view. The market has plunged 12% in four weeks, but remains 60% higher than in March 2009. The pull-back has been consistent with sell-offs that occurred in recoveries following bottoms in 1974, 1982, 1987, 1990 and 2002. The correction has been orderly in that sector returns have been exactly in-line with beta-adjusted expected performance. We expect the S&P 500 to rise to 1300 by mid-year (+21%), before ending 2010 at 1250 (+17%)."

China is up 3.5% overnight as Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton gather for a two-day Strategic and Economic Dialogue between the two economic powers. US futures have been rallying pre-market from down over 1% and Apple (AAPL) has added almost $5 now up 2%. Gold is trading up nearly a percent as well.
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