Value Library

The following is an excerpt from the ABC Perspective - January 2009 - Pg. 16

Bouncing Off The Bottom

2008 was an excruciating year for investors. Moreover, there is no question that the present market conditions remain the toughest that investors have faced over the past 40-50 years. Economic and financial circumstances as well as widespread negative psychology are most challenging and continue to test investor’s conviction and staying power. Interestingly, fundamental investment analysis acquired from serious academic study and honed by years of battle-hardened market experience is completely irrelevant today, as fearful investors seek liquidity as they rush to exit the markets.

Presently, there is overwhelming doom and gloom. Newspaper headlines constantly expound the never-ending string of negative data such as unemployment, corporate profit warnings, plummeting commodity prices (especially oil), rising American real estate foreclosures and declining housing starts and the Madoff financial affair. Investor psychology, quite frankly, is terrible. There is little credibility and followthrough. Moreover in light of the constant flow of this negativity and deterioration of investor wealth, it is not surprising that there remains scanty investment optimism. Nonetheless, wearing a contrarian’s hat and reviewing the numerous monetary and fiscal stimuli by worldwide central banks and governments as well as the significant decline in commodities, particularly oil and gas, we believe that the seeds of an economic and market bottom are starting to germinate.

Although there remain a number of formidable negatives such as government deficits, further banking and corporate bailouts, rising unemployment (a lagging economic indicator), serious Mid-East situation as well as growing economic and political pressures placed on the incoming Obama administration, it is our feeling that many of these negatives are already priced in the marketplace. Granted, stock markets will remain extremely volatile, however, our sense is that the extraordinary price variability of last fall is starting to wear off. For instance, certain credit indicators such as the TED spread, 3-month LIBOR rates and the VIX, a measure of market volatility, have all improved. In addition, the spate of successful multibillion dollar equity financings in December including Royal Bank of Canada, Manulife Financial, Great West Life and Bank of Montreal indicate that, at a price, both Bay Street and investors will underwrite and purchase common shares. This is in direct contrast to the very inhospitable market of two or three months ago when no financings could be completed.

As we enter 2009 we believe a firm base for a significant stock market recovery is being built. Although most investors have little appetite for risk, as evidenced by low Treasury bill rates, a number of common stocks are providing dividend yields of 5%-7%+ with longer term capital gains potential. In the meantime, as the stock market attempts to bounce off the bottom, we believe that selective equity purchases, today, ahead of an upturn in economic, corporate and investment sentiment will provide an excellent opportunity for magnified returns in 2009/2010.

Irwin A. Michael, CFA