Friends
For those who were not able to listen in on the call yesterday, let’s first go over what happened yesterday. Simply put, the already soft market was given an additional jolt from the confusion in Europe. The ECB seems not to have a handle on what to do with Europe’s debt situation. The result was a quick rise in the dollar as funds from Europe began to seek a safe haven. At one point, the Bank of New York indicated that they would actually charge a fee (.17) for deposits over $500 million. The 30-day Treasury bill traded at a negative return, reminiscent of September 2008.
All this rattled an already jittery stock market here in the U.S. and the result was key support levels on the S&P 500 being violated as we broke the 1249 level and cascaded down to end the day at 1200. As we stand, we have officially had a 10% correction and the question becomes – do we endure another bear market (down 20% or more) or is this where the bulls take a stand and build a case that companies are in the best shape they have ever been, and in historical measures are cheap? Of course when you are measuring the value of a company, the price of its stock to its earnings, the key is the denominator or what direction the earnings are headed.
A lot of damage was done on a technical basis to the market, and it will take some time to rebuild the charts, but the key to the next few days will be emotion. Fear reared its ugly head yesterday, but hopefully this morning’s job report helps to calm the markets. We actually created 117,000 new jobs last month which is slightly better than expected.
Earnings continue to be very good as the reporting season winds down, but the macro conditions are trumping any positives that corporations are delivering. Until it becomes more clear how the situation in Europe is going to be resolved (and we talked about that yesterday), and until the uncertainty of a double dip recession is resolved, fundamental stock analysis is going to be less important.
As we indicated in our 3rd quarter outlook, we were concerned about the markets as we entered the summer. We saw the likelihood that the events of the first half of the year (Japan, oil, etc.) were going to manifest themselves in slowing economy and that the end of QE2 would take away the fuel that had sparked the market since last August. We lightened up our equity holdings in preparation for what we anticipated would be a sloppy summer. Well, the last couple of weeks have been more than sloppy, but we always want to remind ourselves that fear and panic creates great buying opportunities. It always feels really good to sell something when everything is collapsing and, of course, it feels great to buy when things are going up. We felt a little silly when the markets rocketed up in the last week of June and first week of July, right after we had done some selling, but days like yesterday make you glad you have some cash ready to buy some bargains.
Stay calm. Stay rational. Yes, there are many challenges ahead of us, but panic is not an investment philosophy. Investing is not an “all or none” proposition. We will always attempt to buy them when they want to sell them, and sell them when they want to buy them. We will look for companies that pay us nice dividends as interest rates are destined to stay low for quite a while.
Please don’t hesitate to call if you just want to “talk about it”. We will try to keep you informed as things transpire. In addition to our e-mails, we are working on a ‘podcast’ capability for our website which will be available in the coming weeks, and we will try to use today’s technology to keep you informed. Let us know what is on your mind. We love your feedback.
Have a nice day everyone.
