Von Aldo

Leuthold Weeden Says Mild Deflation Is Actually Good for Stock Market

I look forward to Leuthold Weeden's giant research book, called the Green Book for the color of its jacket. Leuthold is heavily quantitative and often digs up interesting contrarian nuggests. In full disclosure, I have a small investment in the Leuthold Core Investment Fund, wich is down a little over 4 percent YTD. Anyway, below is the summary to this month's research report.

• Major Trend Index came close to Neutral zone, but backed off at end of July. Current ratio at 0.92 is still Negative, but improved significantly from 0.74 a month ago.

• Beware the summer doldrums, August has a knack of sometimes being a crazy month.

• We are not planning any changes to the asset mix. Net equity exposure is now 53%, factoring in the 9% equity hedge. Despite the still Negative Major Trend Index, we have been reluctant about taking equity exposure to a maximum defensive posture (30% net equity exposure) due to recent market action and relatively attractive valuations.

• The market continues to be viewed as being in a severe correction mode, rather than a full fledged bear market. At this point, we expect the July lows to hold.

• No groups deactivated from Select Industries equity portfolio this month, but realigned capital to get more in synch with latest GS Scores. Initiated new positions in Hypermarkets & Super Centers as well as in Electronic Components.

• Reduced holdings in Consumer Electronics, Managed Health Care, Cable & Satellite, and Paper Products. All still score well, but there are other groups ranking higher that we want to have positions in as well.

• While it may feel like a deflationary environment, CPI not likely to turn deflationary in 2010. Year over year readings for Housing CPI subset +1.2%, Food +1.4%, Medical +4.6%, and Energy +9.3%. The only deflationary subset is now Apparel at -1.7%.

• ....Leuthold historical studies show mild deflation is actually a good environment for the stock market.

• Jim Floyd presents three screens looking for high (and healthy) dividend paying stocks. With bond yields so low, we believe there is opportunity in these types of stocks. See this month's "Of Special Interest" section for all the details.

• MSCI Index very undervalued, as the recovery off the March 2009 lows has left valuations still near prior bear market lows. Relative to foreign markets, the U.S. looks expensive. This is why we continue to maintain a healthy exposure to foreign stocks...especially emerging markets.

• The Q2 earnings season is producing strong results so far, with the "typical" company reporting +30% Q2 earnings gains (YOY) and +8% revenue improvements. There has now been positive YOY revenue growth in the past three quarters.

• In this month's "Inside The Stock Market" section, Eric Bjorgen again updates the long term stock market performance, and compares it to bond market performance. Even after the market recovery, it is easy to see why equity investors are so despondent.

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