Neil Hennessy has for 30 years used the price/sales ratio as his true north on the current state of the market. As of September 23, 2009, the P/S ratio stood at $1.21, up significantly from the $0.60 mark hit at the market bottom on March 9, but now that it is “again within its historical norm,” Hennessy thinks the recovery is underway. The ratio will go lower as corporate sales increase–and since corporations “are much leaner now, much more cost conscious”–those increased sales “will all fall to the bottom line,” and the markets will rise.
In a press conference on October 1, the chairman, CEO, and president of Hennessy Advisors Inc. said he expects hiring to continue to pick up through the fourth quarter–first with part-time and temp employees, then full-time workers–and that once the $9 trillion that is sitting in cash (in money markets, short-term paper) decides to join the rally, the markets will really take off.
Still right now, however, “no one is buying equities,” and in terms of mutual fund inflows, “the money’s all going to PIMCO,” he said, referring to Bill Gross’s fixed income shop.
However, since “rates are going to be higher in five years, why buy fixed income now?” he wonders. With the Dow yielding 3%, he pointed out, “I’d rather hold that than Treasuries right now.”
Unemployment, Hennessy suggests, will remain at 7.5% even as the recovery picks up steam. But he believes the “rally is real” and will be propelled by fundamentals-based, sustainable growth.