Friday, January 8, 2010


I was somewhat surprised that the movie critic for the Washington Post recently named Pixar’s Finding Nemo as the most important movie of the decade. I just watched it again and my favorite character is Dory, a Regal Blue Tang fish played by Ellen DeGeneres, who has a very bad case of short-term memory loss. I won’t go on about the movie because you’ve already seen it, but I find myself identifying more and more with Dory and her memory issues. So, here is my acronym for helping you (and me) remember the most important investment issues to keep an eye on during the first half of 2010. Here it is…DIVEST.

D – Dollar: The dollar has been in a secular free-fall for years but rallied during the worst of the financial crisis on a flight to quality. The dollar has also been negatively correlated to the U.S. stock market for many years. Would a dollar rally on fears of European sovereign debt defaults cause a stock market sell-off?

I – Interest rates: The Fed has kept the funds rate at 0 to 0.25% and shows no signs of raising the rate anytime soon. However, if we get into the virtuous growth cycle that accompanies economic recoveries, will it force their hand?

V – Valuation: So far during the recovery earnings growth has outperformed expectations and the market’s P/E multiple is about fair. Based on normalized earnings the valuation is slightly expensive. If this rally continues will earnings keep pace or will we see bubble valuations as we progress through the year?

E – Earnings: Earnings growth has been fueled by sharp cuts in corporate spending. Investors are looking for the next phase of earnings growth to come from improving sales. Will consumers begin to spend again as we get further into an economic expansion, or will earnings falter as companies run out of costs to cut?

S – Stimulus: The Fed has expanded their balance sheet by more than a trillion dollars. The fiscal deficit is huge. Cash for clunkers, new home credits, etc., all contributed to economic growth. As these programs end during the year, can the financial markets continue to advance or was the 70% gain from the March low about all we can reasonably expect?

T – Technical Analysis: I would have rather just called this momentum, but the T worked well in my acronym. Will the market’s momentum continue to take prices higher regardless of the fundamentals discussed in DIVES? If not, then DIVES is what the stock market may do this year.