|
The volatile and chaotic marketable securities trading of late 2007 has carried into 2008. Continuing concerns about subprime mortgages, asset-backed commercial paper, an American economic recession and last week’s revelation of a $7.2 billion U.S. rogue trading loss at France’s second-largest bank, Société Générale, have enervated any bullish market sentiments. To many investors the glass is not half full but rather it is bone dry.
Interestingly, the two main psychological drivers in the stock market are fear and greed. At their extremes both of these factors instill investors with a lack of clarity, panic and investment irrationality. Presently, the security markets are bombarded with excessive negativity, increasing share price volatility and growing investor anxiety. Basic fundamental analysis such as income and balance sheet inspection have given way to panicky momentum trading and a “Chicken Little” investment mentality. Contrary to the plethora of adverse economic and investment news we do not believe that the sky is falling. In our view the present fearful environment will provide for excellent stock-picking opportunities in the context of a 12-18 month holding period.
In our opinion, given the all-pervasive investment anxiety many stocks have reacted significantly falling to extraordinarily low levels. While the pessimists or bears might contend that the present market meltdown was a long time in coming, to a rational contrarian investor, the current volatility offers remarkable opportunity to purchase selective stocks which have fallen below their intrinsic value. The problem is that the market, up to this point, has not gained traction and today’s bargain purchase often becomes tomorrow’s loser. In effect, one may purchase a dirt cheap stock today and, unfortunately, it becomes cheaper tomorrow. The fact is: it is very difficult and painful to pick the absolute market bottom.
Admittedly, investors are confronted today with a number of economic, investment and political uncertainties. It is our view that with the market decline over the past six months and, in particular, over the past four weeks numerous stocks have priced many of these negatives in their current market valuations. Although we expect common share price volatility to continue we are heartened by declining interest rates, especially the LIBOR and TED spreads, a number of positive earnings results and some recently announced company share buybacks. While investor sentiment remains indecisive we expect the aforementioned low interest rates, depressed corporate market valuations and generally respectable earnings results to generate increased company mergers, acquisitions, takeovers and privatizations.
For many investors the present investment environment is fraught with extreme anxious emotion, lack of confidence and low market expectations resulting in some deciding to throw in the towel and liquidate their investments. On the other hand, to the methodical, patient and disciplined investor the glass is half full and today’s shunned investment could become tomorrow’s big winner. In summary, in the context of a 12-18 month holding period we believe that the wait is well worth the reward.
Thank you,
Irwin A. Michael, CFA |