Value Library

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

Tested To The Limit

Investors have been severely tested over the past 18 months. During this time we have witnessed bankruptcies, fraud, evaporating economic growth, slumping corporate profits, plummeting common stock prices and plunging interest rates. The financial events since last fall including the demise of Lehman Brothers and the bailout of numerous banking institutions, cash infusions to GM and Chrysler and the massive liquidity injections by worldwide central banks have stunned, surprised and horrified investors.

Fear, uncertainty and an extreme lack of confidence have permeated global stock exchanges and the money markets. Earlier in the year a flight to liquidity resulted with many common stocks trading at extraordinary low valuations and, in some instances, they fell below cash values. The extreme share price volatility over the past six months has spawned subsequent periods of huge price appreciation and, at other times, significant price declines. This price movement has enervated investors bringing on intervals of elation and confidence followed by absolute despair. Continued concern over quarterly earnings, fears of insufficient government stimulation and a double dip recession have permeated the global markets. There is little investment consistency and price follow-through. Investors are being tested to the limit, again.

Looking ahead we believe that the monumental worldwide government monetary and fiscal stimulation will start to show some positive effects by autumn 2009. This improvement is largely due to the comparatively weak economic data of late 2008 which will be used as a basis of comparison. While awaiting definite signs of an economic bottom, this is testing investors’ patience despite the fact that the positive effects of government fiscal and monetary policy actions tend to lag by a minimum of six to ten months. This anticipation is very frustrating. As a result, growing investor anxiety and impatience in an already indecisive and capricious marketplace is fueling even greater price volatility and confusion.

Despite these extreme market conditions we believe that the global economies are on the road to economic and investment recovery. Although we anticipate economic improvement to be gradual rather than a sharp V-shaped recovery we expect this consumer-led recession to improve progressively as the significantly increased consumer savings rate, pent-up demand for goods and services and huge cash pools on the sidelines are gradually committed. Clearly, consumer and investor confidence must be refortified and this does not happen overnight.

It is our view that the fickle stock market activity will continue until economic data becomes less murky and business conditions appear to be on the mend. However, the stock market, as a leading economic indicator, will, by then, have largely discounted this improvement. In effect, we believe that investors will have to anticipate the economic and investment turnaround via judicious stock picking and a strong financial fortitude. While we expect equity prices to remain quite volatile for the balance of 2009, this should occur in the context of gradually improving share prices. In summation, although investors are constantly tested to the limit, we believe that the first signs of economic recovery should appear before year-end 2009, and with it, a noticeable upturn in common share prices.

Irwin A. Michael, CFA