Value Library

The following is an excerpt from the ABC Perspective - January 2009 - Pg. 1

Focused

We are in the midst of the worst economic downturn and investment environment over the past 50 years. During the previous 12 months we have witnessed the demise and/or opportunistic takeovers of once-proud and independent banks, insurance companies and investment dealers such as Bear Stearns, Lehman Brothers, Merrill Lynch and AIG. Billions of dollars have evaporated and millions of worldwide investors have experienced a huge diminution of their investment portfolios.

Given the extraordinary economic and financial traumas of 2008 many investors are asking themselves: why even bother to invest in common stocks? In the context of today’s murky investment outlook this is a fair question and, quite frankly, we are of two views. On one hand, for those investors who are feeling extremely uncomfortable, in need of funds to finance a business, normal family life or have a very short-term investment horizon, it is our belief that the risk/rewards of today’s marketplace outweigh staying invested. On the other hand, for those investors who have a longer time horizon of say two to three years, fewer short-term business, family and financial commitments we believe that the present investment environment offers excellent investment rewards.

There is no doubt that the past year has been quite cathartic for serious long term stock market investors. Previously incomprehensible financial and investment events have transformed a rather satisfying post-September 11, 2001 investment cycle to a sort of financial purgatory. That being said, a number of positive factors are now manifesting themselves largely due to central bank, government and investor reaction to the financial happenings of 2008. These include a massive reflation of worldwide economies via government and central bank fiscal and monetary policies, corporate bailouts, etc. At the same time with interest rates, particularly in the U.S., plummeting to virtually 0%, investor sentiment dropping precipitously, continued fears of falling commodity prices, (especially oil), bankruptcies, etc. common stock valuations have become increasingly attractive. In this regard many stocks have tumbled well below book/break-up and replacement levels and, strangely enough, the market does not really care.

As growing investor fears of earnings declines, weakening balance sheets and sell side analysts downgrades have expanded, share prices have fallen further. In consequence, with declining share price valuation estimates and increasing investor apprehension, the bar has been lowered substantially for the 2009 investment outlook. Few investors are focused on fundamental valuations and, instead, are more concentrated on raising portfolio cash levels and risk avoidance. This situation will provide opportunities for 2009. Accordingly, in terms of our 2009 ABC outlook and investment policy, we remain focused on the present opportunities. We are guiding our portfolios toward undervalued, liquid, larger capitalization securities and have recently added TD Bank, Royal Bank, Bank of Montreal and Manulife Financial to our holdings as well as those that are high yielding with improving balance sheets such as George Weston.

Although we expect the stock market to remain quite volatile over the next 12 months it is our belief that value is still value. In the context of the current indecisive marketplace these values will eventually be uncovered. We believe they offer an excellent tradeoff between risk and reward, today.

Irwin A. Michael, CFA