Friday, June 22, 2012

Uncertainty and Short Term Foolishness


Last week in my article, “Should we really be that worried?”  I indicated that all of the media and market hype about the election in Greece would probably turn out to be a bit overdone—and I was right—the Greeks made the right choice and markets sort of yawned.  Then the hype turned to anticipation that the Fed was soon about to institute QE3 stimulus—they didn’t—they did however continue Operation Twist, a form of stimulus, not quite as powerful as QE3.  Piling on, Goldman Sachs issued a report that the market was headed for a fall, and Moody’s downgraded 15 banks---markets did not yawn about this—we had a 2% drop on Thursday—heralded by the media as the second worst day in the market this year.

Bottom line—on Friday we are almost at the same market level we were last week (Thursday close).  Five days of drama---not much change.  Five days of drama—convincing many that it might just be smart to “wait” before doing anything. Considering the US Election, Supreme Court Ruling on ObamaCare, Europe, a possible slowdown in China, and what has been referred to as the “Fiscal Cliff” (yikes!) coming up, it is certainly true that there is a high level of perceived uncertainty.

How much is the uncertainty costing us? Nick Bloom and Scott Baker of Stanford University and Steve Davis of the University of Chicago constructed an Uncertainty Index, concluding that the rise in uncertainty between 2006 and 2011 reduced real GDP by 3.2% and cost 2.3 million jobs. Investors and CEO’s are all doing the same thing—holding back on action—keeping too much cash on the sidelines and not making commitments that might be risky in the short term—no matter how good they look for the long term. (This will change—we just don’t know when. My opinion is that in times of “normal” confidence levels, the market would be at least 20% higher than it is today.)

Do you think the “experts” have less uncertainty.  Like I said, Goldman Sachs,’s Noah Weisberger, the Head of Goldman's Macro Equity team, yesterday cited evidence of economic weakness as the catalyst for an expected drop of 5% from the then current S&P500 level of 1351. But, in March, with the S&P500 at above 1400, Goldman's Chief Global Equity strategist Peter Oppenheimer made the case that stocks were historically cheap relative to bonds and the anticipated growth rate. Their report was titled “The Long Good Buy: the Case for Equities”. Abbey Joseph Cohen, Goldman’s well respected Senior Investment Strategist said yesterday, “With the global economy expected to expand 3.2 percent this year, "our intermediate and long-term view on U.S. equities is positive.” 

The perceived confusion and inconsistent positions of Goldman’s star fortune tellers is really not inconsistent---it describes the “normal” situation for investors----SHORT TERM RISK and LONG TERM OPPORTUNITY.   Stocks are cheap. Could they get cheaper?  Yes. Should you care?  Maybe not—as long as you are not cashing in all your investments next week or next year. Are you trading for short term profit or investing for long term gain and income to secure a comfortable 20” year retirement? It is hard to be a long term investor in a world dominated by media and speculators who are foolishly  obsessed with what might happen tomorrow or in the next few weeks.  Remember the quote, “When others are greedy, be fearful but when others are fearful—be greedy”. Sitting it out on the sidelines, being overly cautious just might not be as smart as you think.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

Friday, June 15, 2012

Should we really be that worried?



Like the famous Yogi Berra quote, “it’s like déjà-vu all over again” or the movie “Ground Hog Day”, we seem to be seeing a repeating pattern of extreme worry and hope.  Although the facts indicate we are in an economic recovery, and corporate profits are setting new records, fears that “it’s only temporary” or “bad is coming back anytime” seem to permeate the psyche of many.

Then add the crazy scenario of Europe with a big election in Greece coming over this weekend (June 17).  Since the Euro Zone and the Euro as a currency are relatively new, nobody really knows what happens if Greece defaults on it’s massive debt, and what happens if they abandon the Euro currency.  The worst fear is always the fear of the unknown.  And…fear sells a lot of newspapers, tv and website ads—so be prepared for some really wild headlines. It is possible that we could see some movement in markets—up or down—but nobody knows what direction or amount—nobody.

Markets like certainty, so really, the worst outcome of the Greek election will be if it is an uncertain one.  But even if it is an uncertain one, history teaches us that those that are “in charge” are probably ready to take dramatic action to calm things down if they get too crazy.

So far, even the biggest pessimist must admit that somehow, over the past four years, the worst fears have generally been very exaggerated and wrong because for the most part, the people “in charge” have responded in a way that keeps the worst case from occurring---or the problems were not anywhere near as serious as reported.   I think my previous posts pretty much sum up how markets act---they are manic depressive and bi-polar to the extreme.  Smart “investors” take advantage of this fact. 

Despite all this fear of short term issues, to me and many others, it appears that bonds are getting very expensive and stocks seem very cheap.  Maybe bonds will continue to go up and many stock prices will continue to be depressed or even fall, but….it is really hard to imagine that stocks are not significantly higher five years from now.  It’s also hard to imagine that rising interest rates and rising inflation are not the most serious issues going forward.

It is hard to be a long term investor in a world dominated by media and speculators who are obsessed with what might happen tomorrow or in the next few weeks.  But history teaches that speculators are playing a zero sum game and long term investors generally become more wealthy by owning great companies during good times and bad.  Long term investors do especially well when they buy some stocks during periods when stock prices are low—like now and most probably next week.

Remember the quote, “When others are greedy, be fearful but when others are fearful—be greedy”.  

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.