Data Suggests Market Overvalued from 22% to 54%

Here is a summary of the four market valuation indicators :

● The Crestmont Research P/E Ratio (more)

● The cyclical P/E ratio using the trailing 10-year earnings as the divisor (more)

● The Q Ratio, which is the total price of the market divided by its replacement cost (more)

● The relationship of the S&P Composite to a regression trendline (more)

To facilitate comparisons, I've adjusted the two P/E ratios and Q Ratio to their arithmetic means and the inflation-adjusted S&P Composite to its exponential regression. Thus the percentages on the vertical axis show the over/undervaluation as a percent above mean value, which I'm using as a surrogate for fair value. Based on the latest S&P 500 monthly data, the market is overvalued somewhere in the range of 22% to 42%, depending on the indicator.

Given the 10.77% monthly gain in the S&P 500 in October, it should come as no surprise that all of the indicators are showing increased overvaluation from last month's numbers. However, as I pointed out in my separate Q commentary, the Flow of Funds data on which the Q Ratio based is increasingly stale. The new Flow of Funds report will be released on December 8th, at which time I'll post a Q update.

I've plotted the S&P regression data as an area chart type rather than a line to make the comparisons a bit easier to read. It also reinforces the difference between the line charts — which are simple ratios — and the regression series, which measures the distance from an exponential regression on a log chart.

Click for a larger image

The chart below differs from the one above in that the two valuation ratios (P/E and Q) are adjusted to their geometric mean rather than their arithmetic mean (which is what most people think of as the "average"). The geometric mean weights the central tendency of a series of numbers, thus calling attention to outliers. In my view, the first chart does a satisfactory job of illustrating these four approaches to market valuation, but I've included the geometric variant as an interesting alternative view for the two P/Es and Q. In this chart the range of overvaluation would be in the range of 31% to 54%.

Click for a larger image

As I've frequently pointed out, these indicators aren't useful as short-term signals of market direction. Periods of over- and under-valuation can last for years. But they can play a role in framing longer-term expectations of investment returns. At present they continue to suggest a cautious long-term outlook and guarded expectations.

Source: Advisor Perspectives

James Turk: What You Need to Know About Gold Suppression

from King World News:

With central bank intervention in gold becoming widely accepted as reality around the globe, today King World News interviewed James Turk out of Spain to get his take on central bank interference in the gold market. Turk started by giving a brief lesson on the history of these failed manipulations, “Yeah, it’s an important part of monetary history. It (the London Gold Pool) was established in 1961 by central banks around the world in order to try to make the Bretton Woods system, which had been created near the end of the Second World War in 1944, it was trying to make that system work.”

James Turk continues: Read More @ KingWorldNews.com

The Best Energy Stock You've Never Heard of: MUR

Energy stocks are often wickedly volatile, especially now with all the uncertainty about the economy. Still, long-term returns may be enormous for those with enough patience to ride out the rough patches.

A fine example of this is the stock of oil giant Chevron Corp. (NYSE: CVX). Despite short-term volatility, the stock has done beautifully, posting annual returns of 16.7% during the past three years, 12.1% during the past five years and 10.3% during the past 10 years. One of my favorite energy stocks, Range Resources Corp. (NYSE: RRC), sports annual returns of 29.4% during the past three years, 23.4% during the past five years and 38.6% in the past 10 years, even though shares of the Texas-based natural gas producer have been known to fluctuate wildly.

Because of their long run-ups, Chevron and Range Resources are trading close to multi-year highs. I think they are unlikely to deliver above-average returns for several years, perhaps longer, based on current prices. (I should note that my colleague, Nathan Slaughter, may disagree with me on Range Resources. Earlier this month he recommended this stock for his Scarcity & Real Wealth subscribers -- and it looks like it was a good move. As we go to press, the stock is up about 16% already.) Regardless, plenty of other intriguing buying opportunities exist in the energy sector, though. One mid-cap stock I have my eye on particularly stands out.

The company is Murphy Oil Corp. (NYSE: MUR), an integrated oil company that, like Chevron and Range Resources, has done very nicely over the long haul. The stock has delivered yearly returns of 11.1% during the past 10 years, and 13.6% during the past 15 years. Yet less impressive are the three and five-year returns of 6.1% and 1.8%. The stock has been subjected to periodic selloffs recently, which have hit most mid-caps, including this one, very hard. As usually occurs in uncertain times, many investors have stampeded out of mid-cap stocks and other assets they consider risky and put their money into things they see as safer. But instead of seeing this as a negative, I see this as an opportunity for long-term investors.

In the process of panic selling, investors have dumped shares of perfectly good smaller companies like Murphy Oil, which has seen its stock drop more than 20% in the past three months and nearly 30% year-to-date. But instead of casting the stock aside simply because it's a mid-cap, I recommend closely examining its fundamentals. They show Murphy Oil for what it is -- a high-quality energy company with enormous potential to enrich shareholders.

Indeed, analysts believe the stock is capable of soaring from about $55 per share currently to between $95 and $130 a share in the next five years, a projected gain of 72% - 136%.

These estimates are feasible mainly because Murphy Oil has been doing an excellent job of executing plans to reinvent itself from a United States/United Kingdom-focused firm to one that seeks opportunities in fast-growing emerging markets. (This sort of global presence is something I usually look for in a company because, when done right, it vastly improves the chances of long-term outperformance.) A key part of those plans is divestiture of U.S./U.K. assets -- like the sale of the company's oil refinery in Superior, Wis. to Calumet Specialty Products Partners on July 29 for $475 million. On September 2, Murphy Oil's Meraux, La. refinery was sold to a subsidiary of Valero Energy Corp (NYSE: VLO) for $625 million. In June, the company confirmed plans to sell the three refineries it owns in Great Britain and reportedly already has buyers for one of them.

Moves like these are meant to free up resources for more profitable exploration and production (E&P) projects in high-growth areas such as Malaysia, Indonesia, Iraq and the Democratic Republic of the Congo, as well as in the Gulf of Mexico and Canada. "The fast-growing Malaysian E&P unit centered at Kikeh and Sarawak fields is Murphy's primary near-term growth engine," say analysts at Morningstar. Because it's shifting focus to overseas E&P, the company is expected to raise production immensely -- from 185,000 barrels of oil equivalent per day (boe/d) currently to 500,000 by mid-decade.

It will also continue growing an existing network of discount gas stations, which now number nearly 1,100 and are located at Wal-Mart (NYSE: WMT) stores in 23 states. By allowing the company to draw on Wal-Mart's huge customer base, this alliance gives Murphy Oil an advantage in establishing profitable new gas stations. The company plans to retain enough refining capacity domestically to support these retail operations.

Analysts project earnings will grow quickly in the near-term, jumping 20% between this year and next, from $5.25 to $6.30 per share. Earnings growth is then expected to slow down but remain very solid, averaging 8.5% annually for the following four years. I suspect that estimate is on the conservative side.

Risks to consider: A greater focus on E&P in developing countries may expose Murphy Oil to political turmoil that ultimately hurts profits. Also, delays or disruptions in project startups could hinder growth and profits more than they would for larger competitors like ExxonMobil (NYSE: XOM).

Action to Take --> Although you may never have heard of Murphy Oil, you should consider buying shares if you're looking for a long-term energy holding. The company is capable of outstanding long-term growth and might even be a mega-cap energy giant of tomorrow. Or, at its current market capitalization of $10.4 billion, Murphy Oil may well be ripe for takeover by one of the meg-cap energy firms of today.

BNN: Top Picks

BNN speaks to Charles Oliver, Sr. Portfolio Manager, Sprott Asset Management. FOCUS: Canadian Resource Stocks & Precious Metals


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U.S. Food-Stamp Use Reaches Record 45.8 Million, USDA Says

The number of Americans receiving food stamps reached a record 45.8 million in August, the government said.

The figure was 1.1 percent higher than the previous month and 8.1 percent more than a year earlier, the U.S. Department of Agriculture said today in a report on its website. Assistance rolls are increasing as joblessness remains at 9.1 percent of the workforce.

Texas had the most food-stamp recipients in August, at 4.12 million, followed by California with 3.82 million, according to the USDA. Spending was a record $6.13 billion.

The number of Americans receiving food stamps under the Supplemental Nutrition Assistance Program has set records every month but one since December 2008.

Gold price recoups losses as Italy’s woes grow

There was further pandemonium in the markets yesterday, as traders came to terms with Greece’s referendum decision, and the fact that Italy appears to be on the brink of a serious financial crisis. The spread between 10-year Italian government debt and equivalent German debt spiked to 459 basis points yesterday, before the European Central Bank intervened – buying Italian bonds with new money in order to stop Italian yields soaring higher still.

As Ambrose Evans-Pritchard reports in the London Telegraph, “the point of no return” for Italy could come when LCH.Clearnet introduces higher margin requirements for those trading Italian government bonds. The trigger for this would be if Italian yields moved to 450 basis points over a basket of AAA benchmark bonds. Yesterday, the spread reached 388 points. Andrew Roberts from RBS notes that Italy’s debt stress is “dangerously close to a level that could cause pandemonium in financial markets.”

The effluence appears to be well and truly hitting the fan as far as the eurozone is concerned, with Italy’s woes placing new European Central Bank president Mario Draghi in a tricky position. Draghi, an Italian, cannot be seen to be acting in a partial manner towards Italian debt – yet monetisation of that debt remains essentially the last desperate option open to the eurozone. As one trader wryly notes in Pritchard’s article, Draghi “better find himself a German grandmother fast.”

The gold price staged a $40 rebound from yesterday’s intraday lows around $1,680 per ounce, and has moved back above $1,730 in trading this morning. Silver has also recovered ground following a move back below $33 per ounce. Gold is holding up better than equities and commodities such as copper and crude oil, with safe-haven buying providing support for the yellow metal. That said, in the short-term, the dash for cash – specifically US dollars – in the face of eurozone problems and concerns about possible bank failures means that gold and silver prices are facing headwinds.

However, over a longer time frame, a slow-and-steady devaluation of the greenback relative to other currencies remains the US Federal Reserve’s chosen plan for dragging the US back to health. With this objective in mind, speculation has been increasing that the Fed may announce the start of another round of quantitative easing later today, following the conclusion of its latest two-day Federal Open Market Committee meeting.

This remains unlikely, however, given the rises in consumer and producer prices in the US in recent months, and the increasing political controversy surrounding “quantitative easing”. Expect instead that Bernanke will reiterate the Fed’s attentiveness to the “threat” of deflation, and that it stands ready to engage in further easing should this be warranted.

Apple Is a Screaming Buy: AAPL

Like everything in 2011, earnings season has been one of extremes. Strong reports are rocketing stocks higher, and any hint of poor earnings is sending investors packing.

Take Apple Inc. (NASDAQ:AAPL) for example:

Apple announced that its earnings results came in below analysts’ expectations, the first such miss since 2004. Revenue for the company came in at $28.3 billion, and the company posted $7.05 earnings per share — representing a 3.9% and 3.2% miss, respectively.

However, it’s important to keep in mind that these results represent 39% revenue growth and 54% earnings growth year-over-year. That’s solid growth for a large-cap company, and gross margin remains high at 40.3% compared with 36.9% last year.

The big reason why Apple posted this miss is because they are a victim of their own success. Customers held off on purchasing iPhones this quarter due to rumors that the company would be introducing a newer version in October. Of course that is exactly what happened, and Apple announced first day pre-orders exceeded 1 million units and exceeded the previous record of 600,000.

In total, they sold over 4 million of the new units in the first three days. This represents more than double the 1.7 million sold by Apple last year during the introduction of the iPhone 4. And, considering that Apple sold 17 million iPhones in the last quarter, the company is well on its way for more blowout top- and bottom-line growth.

This is why the stock was not punished on the earnings miss and will quickly approach 52-week high levels. And I highly recommend that you take advantage of this short-term dip and pick up shares of AAPL under $420. The company is a screaming buy at current prices.