The Buckingham Report

Although those who make their living forecasting such things now think there is a 49% chance the U.S. economy will fall into a recession, according to the most recent Wall Street Journal survey, the equity markets are certainly behaving as if the big 'R' word is already here. And weak economic statistics on the service sector, employment, retail sales and housing have not done anything to brighten the mood. Of course, as the table below vividly illustrates, stocks have actually performed very well on average on a going-forward-basis when the key measure of the vitality of the economy, gross domestic product (GDP) growth, confirms that the economy is either very weak (as the latest Q4 '07 reading from the U.S. Department of Commerce of 0.6% growth denotes) or is actually in recession.

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There have been quite a few favorable earnings reports out this week from companies like appliance maker Whirlpool, healthcare provider Humana, insurer Axis Capital, aircraft cabin interior products maker B/E Aerospace, automotive giant Toyota Motor, entertainment titan Walt Disney and oilfield services provider Bristow Group, but we recognize that the strength of corporate profits is a major concern in the near term. Clearly, when a major technology bellwether like networking king Cisco Systems warns that January sales were below plan and when Cisco CEO John Chambers says on CNBC, "We are seeing our U.S. and European customers being increasingly cautious," short-term earnings estimates for many companies will likely have to come down.

While it is likely to continue to be a bumpy road in the near term, and though we know that markets can go to extremes on the downside and the upside, we keep handy a Morningstar reference that shows stocks historically have returned* 10% to 12% per annum over the past 80 years. In addition, we believe that there are two touchdowns (and two extra points) worth of reasons for long-term-oriented investors to be excited about the prospects for U.S. equities over the next three-to-five years.

Of course, that last one hasn't helped matters this week, but given that we are football fans around here, we thought we would do our own number-crunching on the Super Bowl Indicator.

In the 1970’s, Bob Stovall helped popularize this weather vane for predicting the year-end returns for the Dow Jones Industrial Average based on who won the Super Bowl. Since the merger of the NFL and AFL in 1967, if a team from the original NFL wins, stocks are supposed to rise over the rest of the year, while an AFL victory signifies an expected decline. For quite some time this predictor was shockingly accurate (90% in first 31 years) before dipping over the past few years (those darn Patriots, an original AFL member).

It does get a little more complicated, due to the expansion teams that entered the league following the merger (6 in all). The consensus take on the additional teams is that if they presently reside in the NFC, they would count as the original NFL, whereas the AFC teams would count as AFL members. Another point to consider is the allocation of the Cleveland Browns and Baltimore Ravens (formerly the Browns). When the Browns moved to Baltimore, the League deemed the newly named Ravens an expansion team, thus putting them on the AFC side of the ledger as they are now members of the AFC North division. The new Browns franchise is still considered an original member of the NFL. Sadly, for long-suffering Browns fans, the Ravens won Super Bowl XXXV in 2001!

Here is how the 32 teams are presently categorized:

 
We decided to add a little different flavor to our study as we chose not to look at the returns of the Dow but rather the Large-Cap and Small-Cap data calculated by Morningstar. Still, the overall numbers through 12/31/07 are about the same with the Super Bowl Indicator being a slightly more accurate predictor of large-cap performance - 78% accuracy when an NFL team wins - than small-cap performance - 76%.

Doesn't mean anyone should invest based on the outcome of the Super Bowl, especially given that the Crash of '87 came in the year the Giants won their first Super Bowl! Of course, in both 1987 and the Giants other Super Bowl-winning year of 1992, the Dow Jones Industrial Average closed higher, even as Large- and Small-Cap returns were mixed.

Paying far more attention to the first 13 reasons to be optimistic, I'll be adding money and using a little bit of margin to purchase another 10 stocks for my Buckingham Portfolio tomorrow.

*Past Performance is no guarantee of future results.

The information contained herein is believed to be reliable. However, such information has not been verified by us and we do not make any representations as to its accuracy or completeness. Neither the information, nor any opinion expressed, shall be construed to be or constitute an offer to sell or a solicitation of an offer to buy any securities.

Opinions expressed are those of John Buckingham, which are subject to change without notice and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice.

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About Al Frank Asset Management

Al Frank Asset Management, Inc. (Al Frank) is a Registered Investment Adviser, is editor of The Prudent Speculator (TPS) newsletter, editor and publisher of The Prudent Speculator TechValue Report (TVR) newsletter, and is the Investment Adviser to two value oriented no-load proprietary mutual funds and individually managed accounts.

Al Frank is committed to assisting our customers build wealth. We are a leading resource for value-based investor information in the financial community, where we combine our simple, proven philosophy of buying what we believe are under valued securities for their long-term appreciation with our experience, hard work, and intensive research to give you actionable investment information that can be used on a daily basis.

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