The market’s focus seems to be shifting. For most of last year, the attention of investors were placed squarely on the deteriorating situation in Europe. The debt crisis from troubled economies like Greece, Spain, Italy and so on was a dark cloud that loomed over the U.S. market. But as we’ve seen since December, investors are ready to move on. We think it started with the European Central Bank rolling out the LTRO (long-term repo operation), which is like their version of the TARP.
With nearly €1 trillion injected into the market, the ECB is trying to increase liquidity in its banks. We’ve seen some good strength in the market with stocks rallying since the start of the year. We said before that we expect to see some selective decoupling in 2012, and we think this has been happening and will continue to happen.
Our indicators at Singular Research are positive and it’s telling us that there’s great underlying strength in the market. Stocks seem to hold up in the face of mediocre earnings, which had already had the bar set pretty low. Investors are looking more at valuations now and becoming less knee-jerk regarding headlines. Both investors and corporations are getting tired of zero interest rates, indicating that the sideline money that could be a bigger factor going forward.
We do favor small caps overall because of their sensitivity to pick up with a recovering economy. At Singular Research, we focus on companies that lack coverage and are misunderstood, and therefore, mis-valued. Our selective coverage list trades at about 11x-12x with 20-percent-plus growth. That should give you a fundamental idea of the value we think is available in this market.