Value Library

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

The Worst Is Over ... Again

In all candor, the past 12 months have been the most difficult and stressful period in my professional career. During this time, investors faced continuous financial anxiety, hopelessness and effusive media scaremongering. Family nest eggs, frugally and tediously saved over the years, appeared to be evaporating. The sky seemed to be falling. People around the world were terrified, having sensed a 1929-style economic depression.

Fortunately, worldwide governments pulled together with massive monetary and fiscal stimulus, takeovers, and economic backstopping programs. These activities bought us time and swept us away from the expected financial brink. This is not to imply, however, that everything is now hunky-dory. It is not; there is still much financial and economic repair to go. Nonetheless, we expect a slow but steady consumer and business recovery despite the present lagging economic indicator of deteriorating employment. It is our belief that the worst is over.

As I reflect on the events of the past year, I cannot help but feel a certain sense of economic déjà vu. Looking back 15 years ago to our comments in the April 1995 ABC Perspectives, could provide a greater understanding to what we experienced over the past 12 months and what lies ahead.

“Nine months ago, in the July 1994 ABC Perspective, we stated that all the rampant investment negativity was music to our ears.  . . . While not perverse, we do like what we see: plunging stock and bond prices, shattered investor confidence, loss of patience and the general feeling that investors may be swearing off equities for the relative safety of treasury bills.  . . . Nevertheless, we believe that sometime over the next six months an incredible buying opportunity will present itself. In the meantime, the stock market will severely test investors’ courage and conviction.  . . . But we believe that the disciplined, patient investor will be substantially rewarded over the next 12­­­–18 months. . . . Since writing these comments 9 months earlier, Canadian investors have endured a host of negative events. These include: the election of the separatist Parti Quebecois in Quebec (and a pending all important referendum), Orange County, Barings Bank, several U.S. Fed interest rate increases, the virtual collapse of the Mexican currency/stock market and the precipitous record-lows of the $US versus the Japanese Yen and German Mark. Furthermore, an influential Wall Street Journal editorial in January, 1995 labeled the Canadian dollar the “Northern Peso”, as we anxiously awaited the Paul Martin – February 27 federal budget. The budget, in fact, turned out to be a very positive and credible step toward federal deficit reduction. Not to be forgotten was the recent Moody’s announcement that it had placed the Government of Canada’s debt rating under review for the purpose of a possible downgrade.

In short, Canadian financial markets have suffered through a spate of negatives and no financial collapse has occurred. The Canadian securities markets have actually climbed a “formidable wall of worry”. If there was ever a time for the Canadian dollar to plunge to 65¢ and for Canadian stocks and bond prices to literally disintegrate . . . the July 1, 1994–March 31, 1995 period should have been the perfect time. But, fortunately, this never happened.”

Contemplating over these 15-year old comments, I have several observations to make:

1. The troublesome 1994–1995 period was as comparatively difficult as the 2008–2009 interval.
2. The business cycle is alive and well. It frequently repeats every 10–15 years, testing our resolve.
3. Strangely enough, while investor emotions can become extraordinarily negative, the overall economic/financial system has the incredible ability to mend itself. More importantly, the worst fears rarely come to pass.

Irwin A. Michael, CFA