Value Library

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

Looking Beyond the Valley

I am an optimist. When I arrive at my office in the morning, I face my work with the attitude that the glass is half full rather than half empty. I approach my daily responsibilities vigorously and carry a positive outlook in our incessant search for undervalued securities.

At the best of times our work is exciting, challenging and both materially and psychologically rewarding. Unfortunately, at its worst, the daily routine can become extraordinarily stressful, fatiguing and financially hurtful. Needless to say, the past year, up until the last few months, has been brutal. My industry peers and I have been tested to the absolute limit. During the September 2008–March 2009 stretch, investors were confronted with numerous American bank failures followed by massive government assistance and intervention, enormous corporate asset write-downs, the virtual collapse of the U.S. residential housing market, enumerable home foreclosures and a severe pounding of worldwide auto sales. These events, in turn, resulted in a serious global economic contraction producing spiraling unemployment, anemic consumer spending and unparalleled business and consumer anxiety. In effect, it appeared that the whole world was on a virtual economic strike as both business and consumers refused to spend.

Clearly, nothing in business or economic textbooks had prepared us for what was to befall investors during the late 2008–early 2009 period. Fortunately, worldwide governments and central banks banded together in a coordinated and massive monetary and fiscal action to extricate the global economies from falling into a deep 1930s-style economic depression. Now, six months later, since the mid-March 2009 stock market lows, worldwide economic stability appears to have set in. Investors’ psychology has improved remarkably and a significant financial comeback from the early 2009 price lows has occurred. Despite these advances many seasoned investors and economic commentators do not believe in the sustainability of the present economic and investment recovery. Moreover, numerous investors, despite missing out on the spectacular stock market recovery since March, are very reticent to commit any funds for fear of a major stock market decline. They are gun-shy and are concerned that this stock market rally is merely a head-fake before the market tumbles precipitously. This bearish camp considers that the valley or economic abyss is quite deep and elongated. Their negative outlook centers on the view that there will be significant economic risk and little reward until global economies attain terra firma stability — without the continuing massive government monetary and fiscal stimulus.

Notwithstanding the negative economic argument we take a rather positive and contrarian view. We believe that one must look beyond the valley. It is our opinion that a worldwide economic turnaround is already in place, fragile as it may be. Although we do not expect either a V or a W-shaped economic recovery, we do believe that a slow but steady sawtooth-like improvement is the most likely economic scenario. We believe that successful investing for the balance of 2009 and into 2010 will necessitate diligent stockpicking, opportunistic share trading, portfolio upgrading and an assorted selection of high dividend-paying securities. We believe that the low interest rate environment should last at least for the next six months and should provide for exceptional investment opportunities.

Irwin A. Michael, CFA