Wednesday, October 1st, 2008...9:43 am
The Morning After
Baltimore, Maryland
- The only stock in the green after Monday’s bloodbath,
- What next for the gripping tale unfolding,
- Employing a cool head when things really heat up and more…
Joel Bowman, reporting from Dubai in the Persian Gulf…
As far as entertainment value goes, the markets have really delivered the goods this week.
After the opening acts, in which many a Wall Street Goliath were spectacularly slain, your editor was left wondering what other surprises were to come. How will it all end, we pondered? What will be left when the final curtain comes down and the last twist is played out? Who will come to save the day?
For many, the theatrics of late are more akin to a tragedy than a comedy. Indeed, grisly deaths in the marketplace have thus far outweighed love stories by a considerable margin. Even the awkwardly forced marriages (think Merrill and BofA, Wachovia and CitiGroup, AIG and – shudder – Ugly Uncle Sam) seemed oddly lacking in passion and steamy love scenes.
After a brief intermission over the weekend, audiences returned to their seats on Monday only to witness the bloodiest, most action-packed day of production in over two decades. The Dow freefell 777 points while the S&P 500 was down 8.8% by the time the scene was over. The whole show must have taken an army of pyrotechnics to pull together.
On the morning following Monday’s climactic events, Chris Mayer distributed the following special alert to his subscribers. In such a fever pitch environment, it is invariably the cooler heads that prevail. For a calm and collected take on all the action, we invite you to consider Chris’ long view below. Enjoy…
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The Morning After
By Chris Mayer
Campbell Soup.
Did you know that was only stock in the S&P 500 to finish in the green yesterday? The S&P 500 is a fairly broad gauge of the stock market. It’s broader than the Dow Jones industrial average, and it’s the benchmark I use internally to measure my performance against. If you need any proof of the widespread nature of yesterday’s crash, look no further than the S&P.
Seeing it fall as much as it did yesterday was a rare financial event. It fell 106.59 points, or 8.8%, the worst day since Oct. 26, 1987. (On Oct. 19, 1987, the S&P 500 dropped more than 20%.)
So congratulations if you’re reading this. You just survived the worst day for stocks in 21 years. The context for the fall was the failure of the House to pass the so-called Paulson plan, a $700 billion bailout bill. This set off a comical round of finger-pointing and political showmanship that was truly entertaining. I hardly ever watch CNN, and I can’t stand to hear politicians talk for more than a few seconds before I have to leave the room. But yesterday was some good theater.
And it proved the old adage that the stock market is a good source not only of investment value, but also of entertainment value.
There are plenty of both in today’s markets. Investment anomalies abound in all markets at all times. But the undervalued gems we treasure are particularly plentiful during times of panic. Suffice it to say, yesterday was a panicked selloff.
I don’t believe the rescue package will do all that much either way. I think the credit excess of the prior boom needs purging from the system. The losses will happen either way, whether or not the government bails out a bank. It’s just a matter of who bears the cost. The government bailout option seems less painful because it dilutes the pain over a large population of taxpayers.
As people usually do, they will take their money out of the markets. I am here to tell you that if you haven’t taken out what you want to take out by now, you are too late. Better to stick it out, unless you have a need for tax losses. It’s just like locking the barn door after the horse has been stolen.
It’s not only the typical investor who likes to take his money out when markets fall and put it in when they are rising. (This is why the typical investor doesn’t earn even the stated returns on mutual funds — his timing stinks.) People who are wealthy and should know better do the same thing.
Today’s Financial Times notes how hedge funds are bracing for massive withdrawals by their clients. I am sure many hedge funds will fold under the redemptions. This will force more selling and unwinding of positions. Stock prices will fall even further. And as you can plainly see, this kind of selling is not rational. So gaps between share prices and net asset values will widen even further in some instances.
Other things happening of interest…
The pipeline of initial public offerings in emerging markets is drying up. Brazil’s deal flow is down 76%. China’s is down 52%; India’s, 35%, and Russia’s has basically been shut down since the Georgia incident. It just goes to show you, in another way, how money is tight. IPOs are pulled because the underwriters don’t think they can sell them — at least at prices they can live with.
When stock markets fall, investors get disgusted. They throw in the towel, as the saying goes. I’m telling you this is the time to be most alert. Any old fool can make money when the market rises. Those who really excel in those up times are the ones who built low-cost positions when things were ugly.
One other note of importance out of all this…
It looks as if we will see a drop in quarterly consumer spending for the first time since the 1990-1991 recession. We’re set up pretty well for this, as most of our companies make needed things. We own no retailers, for instance. We don’t own anybody selling iPods or gadgets or premium apparel.
So I would also remind you of the long-term themes we’ve worked out in these pages over the years. Not much really changes in many of these ideas. Certainly, a deep recession affects everything. Infrastructure projects may face delays, for instance. Energy projects look less profitable at $95 oil than $140 oil. But certain essentials remain.
Infrastructure across the spectrum is old. No matter what happens with the economy, it will need replacement. Energy needs may abate somewhat, but here, too, there is a huge replacement need, even forgetting new growth.
These are just a few ideas. In Friday’s alert, I’ll try to give you some more specific advice about individual stocks that look particularly interesting here.
Remember, too, rough seas make skilled mariners — and tough markets also build skilled investors. Stay alert for new opportunities. And don’t panic.
[Joel's Note: As Chris astutely points out, the essential elements that drive companies of sound and honest standings to greatness have not abated. With debt-free balance sheets, unique market position and strong management at the helm, many of these companies will emerge from the ashes in a position to take early advantage of the coming fire sale.
The best thing about this whole meltdown, from a contrarian investor’s perspective, is that many fundamentally sound companies have been tarred with the broad strokes of the market’s brush and some now sell for steep discounts to their true value.
Over the past few years, Chris, an avid value investor, had padded his Special Situations portfolio with companies of precisely this ilk. In these times of distress, when the wheat is sorted from the chaff, the careful investor will discover many an attractive opportunity amidst the ruble. If you’re the kind of investor that relishes a spot of discount shopping, this report may be of interest to you.
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[Rude Endnote: Your editor is leaving for his monthly visa run over the Omani border tonight. We only have three more such journeys before we depart for good in December but, with each stamp on our dog-eared passport, the odds of being left stranded in the desert grow more likely.
We’ll check in around the same time tomorrow…from wherever we end up.
Until then…
Cheers,
Joel Bowman
The Rude Awakening
aussiejoel@the-rude-awakening.com
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