Don’s Outlook 10/24/08
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Global markets have trended lower this week and despite exhibiting strength along the way, the selling accelerated again today. Shares in Asia and Europe tumbled, and the U.S. bourses are following suit. Investors are focused more on the looming recession than the fact that stock prices have already corrected to levels indicative of past recessions, including those of 1973-74 and 2000-02.
Economic data was mostly negative this week; news of layoffs and gloomy forecasts from major corporations such as UPS dominated the headlines. Nevertheless, there were bright spots: Dow Chemical beat its estimates thanks to price increases which more than offset commodity costs, and that included a quarter in which the company suffered weather-related losses. Dow will also proceed with its business plans, regardless of the economy, but CEO Andrew Liveris said his goal of maintaining profits above $3 per share will be impossible in the anticipated economic environment.
Another bright spot is the U.S. dollar which continues to strengthen against most currencies. While this can pose a challenge to our defensive positions in large multinational companies that export their products, these firms have weathered periods of currency fluctuations in the past. A primary benefit of a stronger dollar coupled with global economic weakness is plunging commodity prices. Oil futures contracts for $50 per barrel oil are trading heavily, indicating many people expect the price to fall much further. This will alleviate inflation pressures in the short term and help buoy spending and investments.
Nonetheless, level-headed investors with longer time horizons are finding places to invest. The stock market is a forward looking market—where prices reflect investors’ future expectations—yet many investors only focus on the long-term during bull markets, becoming increasingly short-term focused during bear markets. Initially, the credit crunch caused panic among investors, but even as the fears of the crunch abate, we are witnessing a wider acceptance of economic difficulties, adding yet another layer of worry. Much of the herd is still panicking and forcing sales due to excessive leverage; in the case of some hedge funds, this is pouring gasoline on the fire.
This bear market so far has been a restoration of value. Stocks are trading at price to earnings ratios not seen in decades. Given the extent of the selling to date, the stage is being set for an impressive rally. Many of the concerns that have weighed on stocks—dislocations in the short-term credit markets; the onset of the current earnings season; a pending Presidential election; and forced liquidation of mutual fund and hedge funds alike—are either problems or questions that are beginning to resolve themselves. Here at Dion Money Management we are committed to working with clients to conquer emotions, set goals, and focus on the fundamentals. Regardless of short-term fluctuations, the long-term story of global growth is intact, and investors who are willing to wait could capitalize on many great bargains.
