The stock market weakness of late July has continued into August.  Increasing investor concerns about sub-prime mortgages, hedge fund losses (e.g. Bear Stearns), softening U.S. real estate market, tightening banking conditions and uncertain private equity takeovers have enervated investors.  These circumstances, similar to a dog chasing his tail, have spawned further market fears.

Investors wishing to react to this situation by raising cash reserves are confronted with little investor interest.  This has resulted in a bit of a buyer's strike.  In consequence, North American and international stock markets have become exceedingly thin,  volatile and treacherous for those acting on spontaneous, superficial emotions.

The worldwide central banks, to their credit, have quickly recognized this precarious situation and have pumped in billions of dollars of liquidity over the past few days into the global financial system.  Their action should stabilize world markets in the near term and allow for a less harried market activity.

Interestingly, the growing fears of investors over the past several weeks and the rush by motivated sellers to raise cash at whatever the cost has, in our view, severely depressed certain individual securities.  In a number of cases, companies with absolutely no sub-prime mortgage exposure and carrying little debt have been severely punished by the crescendo of "Chicken Little fears".  To the calm, methodical and astute investor, this often provides for excellent opportunities.   Furthermore, for some deeply undervalued companies, share buybacks or going private transactions might become the best use of their corporation's funds or borrowing power.

In summary, deep market corrections habitually do happen and the present period is little different from our previous experience over the past nine or ten years.  At this time we foresee neither economic recession nor an extended stock market decline.  We intend to continue upgrading our ABC portfolios as well as diligently hunting for fundamentally-undervalued equities.  While we remain mindful of the current volatile (and very trying) market conditions, we remain steadfast in our hunt for long-term deep-value securities.

Irwin A. Michael, CFA