Wednesday, 15 August 2007

"Stay Calm, Relax, The Markets Always Come Back"

Does our title sound familiar? Perhaps not to avid Cheap Stocks readers, because we rarely, if ever, comment on the markets. You can get that anywhere. But tonight, as much as it goes against our grain, we are going to make a few comments.

Like it our not, what is currently happening in the financial markets is unprecidented. As much as pundits like to compare to the Long Term Capital Management debacle, the Asian crisis, (or insert your favorite era of market upheaval here), it is not the same. That does not mean that this won't ultimately pass, but is a reminder that we are always looking for comparisons, often fooling ourselves in the process. Makes us feel better as we watch our account balances shrink. We may be able to weather a downturn--if we aren't overleveraged, and forced to become panic sellers in the meantime, as long as we believe the return of the bull is just around the corner.

As investors, we have difficulty with down markets, (that's behavioral finance at work) difficulty with uncertainty, and we want downtrends to reverse: quickly. This time, maybe it will turn next week, or maybe it won't. We don't know. Anyone who claims they do, and ends up being right, is probably just very lucky. And, afterall, even a stopped clock is right twice a day.

The bottom line is that the markets, whether fixed income or equity, still run on a very basic principle, supply and demand. The highest quality piece of debt, or equity can languish if no one is buying--as value investors, this is something we know all too well. On the flip side, even a "dog with fleas", to quote Michael Douglas from Wall Street, can appreciate quickly if investors are buying- thats what we saw happen frequently during the tech bubble.

As asset backed securities (or ABS) continue to get crushed (more sellers than buyers)--even those of the highest credit quality that likely have little chance of default, as trouble in the hedge fund world continues, as some "quant" managers see their models failing, and as a small number of funds close their doors to redemptions, it is not surprising that volatilty has returned to equity land. Yes, it will ultimately end. But when? We don't know.

So what's the point of this diatribe? Just a venue for your Cheap Stocks editor to rant...albeit somewhat incoherrently. In all honesty, as painful as it may be, excesses in the markets need to be washed out from time to time, and that's exactly what we are in the midst of.

In all seriousness, if you are not a forced seller, and if you have some cash on the sidelines, folow the quality names you've had your eye on, or already may have a position in. You just might get your chance to buy some high quality names on sale. For what it's worth, in general, equities are not overpriced at this point. After today's action, the S&P trades at less than 15 times forward earnings.

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