Three Reasons to Be a 90-Day Bull

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Created on Friday, 30 September 2011 05:00

Published on Friday, 30 September 2011 05:00

Written by Andrew Snyder, Editorial Director, Inside Investing Daily

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History shows this is a good time to be a buyer. There are three reasons you should be bullish.

I'm excited. The next three months look like moneymakers. Don't get me wrong... Our country is plummeting downhill faster than a fat kid on a scooter. But for the next 90 days or so, we've got a shot at profits.

Here's why.

Over the past 66 years, the S&P 500 has gained an average of 7.2% during the final three months of the year. What's more, the so-called Santa Claus rally has sent stock higher four out of five years since 1945.

The odds are in our favor, but not everybody is convinced. So here are three reasons to put on your bull horns... at least for the next three months.

Reason 1

First... earnings. It's a subject we don't hear much about these days. After all, there are bigger worries. Europe is melting down. Unemployment won't budge. GDP growth is down to a mere rounding error.

You name it, it's in the crapper.

But let's not forget what we're doing here. When we buy a stock, we're not placing a bet on Angela Merkel's monetary mood or Washington's latest crisis. No, we are buying a very real stake in a company's profit stream.

We're spending $10 or $20 or $45 per share to put our hand under its cash-flow spigot -- the quicker the flow increases, the higher our profit potential.

With that in mind, let see what Mr. Market expects from the upcoming earnings season. The magic number is 15% -- Wall Street expects corporate Q3 earnings to jump by 15% from the same time last year.

Given the dire news over the past six weeks, investors don't have high hopes. A 15% boost in profits sounds like a lofty goal.

Let's compare it to a blind date.

When our lonesome single rings the doorbell, his heart is pounding. Will she? Or won't she? Bow-wow or ayoooga?

We won't know until the door swings open. But history shows -- going back to stocks now -- she's not all that bad.

For a peek at what may be behind our Q3 earnings door, we turn to McCormick (MKC:NYSE). It gave us a glimpse at its books on Wednesday.

Guess what... surprise. Income rose by 16%, easily beating consensus estimates.

Better yet, the spice maker is not alone. UBS just took a look at 19 companies that reported earnings since Aug. 1. On average, they beat earnings estimates by 3%.

If the trend continues, it's reason No. 1 to be bullish for the next three months.

Reason 2

The second reason is much simpler... the game is rigged.

Over at Insiders Strategic Review (our private daily note to subscribers) we've hit on the subject time and time again.

In fact, yesterday we covered the politicization of the Fed -- how Bernanke has sent his troops to all four corners of the country to campaign for his free-money policy.

But now, it gets worse.

Rick Perry's bid for the White House is using the Fed to its political advantage. If the Texan makes it to Washington, he swears Bernanke is out of a job.

It is bad news for Big Ben (... and the printing press industry), but good news for investors.

As long as the money boss is fighting to keep his job, he can't manipulate the economy. From here through the election, we won't hear much from the Fed. It's too risky.

That's good news... As we saw last week, when Bernanke talks, the market walks.

The Fed takes us to our final point.

Reason 3

Thanks to Bernanke's ultra-low interest rates, the companies that make up the S&P 500 are sitting on a huge wad of cash -- some $976 billion. As risks loom, the best way they can use that money is to buy their own shares.

Warren Buffett is not the only one doing it. In fact, stock buybacks have been on the rise for eight straight quarters.

During this year's second quarter, the companies that make up the S&P 500 went on a buying spree -- shelling out $109 billion to get their own shares. It's 41% more then they spent during the same time last year and a 22% jump over this year's first quarter.

For old-school value investors (those were the days), it is a clear sign the people that know their shares best believe their stock is undervalued.

Until that cash starts heading in other directions, it's our third reason to be bullish.

Like I said at the top, we're still in trouble... big trouble. But don't let the long-term view overshadow the short-term opportunity.

As we've seen over the past 16 months, the situation in Europe will take a long, long time to come to a head. And America could be the land of debt for at least another generation... or two.

Remember, history shows 80% of the time the fourth quarter is a strong winner. We've got the ingredients for an end-of-the-year blowout. I'm excited.