The bullish case for America

In the past, I’ve written numerous articles positing a long-term optimistic outlook for both our economy and the attractive future growth prospects of our great American businesses. Even though I hate to forecast the market in general, I have even presented evidence indicating that the general market as represented by the S&P 500 (INDEXSP:.INX) is currently reasonably priced and even slightly undervalued. My most recent contribution can be found here.

Unfortunately, at least in my opinion, optimistic views on our economy and/or our markets are generally met with resistance and even criticism. One of the most common arguments to counter my optimism is the statement by my antagonists that they are realists. Thereby they are implying that my optimism is unrealistic, and moreover, that a pessimistic outlook is more realistic than an optimistic one. Yet, there is a preponderance of supporting evidence for optimism that is both ignored and even refused to be given consideration to.

In an attempt to clarify my point, I presented the following F.A.S.T. Graphs™ (actually one very close to this one, but with slightly different dates) in my most recent article reflecting that the S&P 500 is modestly undervalued at this time.  The orange line on the graph represents a PE ratio of 15 applied to an earnings growth rate (slope of the line) of 7.7% since the beginning of calendar year 1993.  All of the data is historical actual, with the exception of an estimate for 2012 earnings currently at $104.70 per share.

Now, what this graph clearly shows is that the actual blended PE ratio of the S&P 500 of 13.1 based on actual earnings since 1993, is one of the lowest it has been (remember the orange line is a PE of 15).  This is not a statistical reference, but a picture of what has actually occurred and how the market has actually valued the S&P 500 since 1993.  Clearly, the market has overvalued the S&P 500 (the black price line above the orange line) for most of this almost 20-year period, until and since March of 2011. This is important information, with no conjecture or hypothesis involved just pure unadulterated facts.

Getting back to my optimism vs realism theme, the graphic also shows two time periods where earnings fell.  The first time occurred during the recession of 2001, and then once again during the recession of 2008. The realist in me recognizes that these temporary economic interruptions can and do occur.  However, the optimist in me recognizes that they are always temporary, where growth will eventually return, as it always has. In other words, it is realistic to acknowledge that business cycles occur, but even more realistic to realize that they do correct themselves.  Consequently, I never fear them.

But here is where the argument really gets interesting.  The naysayers will immediately point out, and almost take great pride and even glee in stating that the good economic times are permanently behind us and that the once great American economy is now doomed. Therefore, forecasts for future earnings growth are Pollyanna optimistic because our economy is now weak and soon set to implode. The rationale behind their belief that the American economy is weak and collapsing will usually focus on the huge debt load of our government. Next they will further lament on how the same potential bankruptcy exists for all of Europe as well.

My biggest problem with this line of reasoning is that I believe they are erroneously equating the health of government with the health of our economy.  Contrary to what most people believe, or are willing to accept, government does not run the economy, and government is not the economy.  In fact, I believe and I will be discussing it in more detail later in this series of articles, that what our economy really needs is a lot less government and our markets a lot more freedom. In short, government is an expense and not a factor of production.

This leads me to perhaps some of the most important statements I will make in this whole series of articles.  The true strength of an economy lies within its productivity capabilities. In this context, there is no economy that exists today, nor any economy that has ever existed on the face of this earth that is more productive, and therefore more powerful and healthy than the US economy of today. But even more importantly, our future productivity over the next couple of decades is poised to grow exponentially.  As this occurs, future prosperity and the opportunities it brings with it are nothing short of remarkable.  Yes, that is an optimistic statement, but also realistic at the same time. Over the course of this series, I intend to provide numerous reasons and evidence behind my cheerful view of our country’s exciting future economic potential.

Building The Case For Optimism Factoid Number One

Human beings worldwide seem to have a penchant for pessimism.  Surrounded by amazing and exciting reasons to be grateful and to feel good about our futures, we will obsess upon problems perceived and/or imagined and blow them completely out of proportion.  However, that is not the worst part, because in so doing we become oblivious to the good and therefore overwhelmed by the less relevant bad that we only acknowledge.

I will once again turn to my friend John Bodnar to put what I said thus far into perspective as he so uniquely is capable of doing. The following excerpt from one of his recent writings provides an interesting spin on my thesis for optimism over pessimism:

Boring!  As the sages in the media fixate on inequality,” Occupy” encampments and street confrontations, one of the mega- trends of the new millennium continues to steam roll across the planet, and will very soon achieve a historic milestone. Very soon my friends, for the first time in history, a majority of our fellow residents on God’s green Earth will live above the global poverty line. More folks ABOVE the poverty line than BELOW it. Hallelujah!  Yet no parade.  Why?  Because the truth flies in the face of the negative narratives of the declinists and their lap dogs in the media .

 A monster mega-trend ignored by the media? Should that shock us? Only if you were shocked that there was gambling at Rick’s in Casablanca. The information that most investors get is terrible. Akin to financial pornography. The latest drumbeat is Europe; avoid Europe at all costs.  Here’s a memo to all financial journalists: the year is 2012 and the zip code of the home office of the company is now officially irrelevant.  As investors we should care only about where the company’s customers and earnings are located.

The greatest companies in the world know their competitors and are globally diversified.  Which company is the bigger USA play?  Coke with an Atlanta zip code and only 20% of sales in the USA, or Nestlé domiciled in Switzerland with more sales in the US than Coke? Journalists

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