Value Library

The following is an excerpt from the ABC Perspective - January 2011 - Pg. 1

Financial Markets: Bouncing Back Toward Prosperity

As I write this investment commentary I am far away from the financial madding crowd safely ensconced in the confines of a Florida condo some 1,500 miles from Toronto. Reflecting back over the past three years of extraordinarily stressful and tumultuous financial markets it is fairly obvious that investors have experienced both the best and the worst of investment times.

Specifically, investors experienced a virtual financial purgatory from the demise of Lehman Brothers in September 2008 to the absolute bottom of the equity market in mid-March 2009. From the depths of the boundless stock market despair in early 2009 the international financial landscape was characterized by an overwhelming crescendo of all-enveloping fear focused on the ascending risks of a worldwide banking collapse, corporate bankruptcies, a complete consumer spending halt and, in effect, a second coming of the 1929-33 Great Depression.

We were all severely tested as our conviction or psychological fortitude was put to the proof. Many investors were so thoroughly enervated by the then current events of Ponzi schemes, looming bankruptcies, employee layoffs, the obligatory government and central bank bailouts et al that they simply threw in the towel. These investors sold all or part of their marketable securities and swore to never return to common stock investing again. Many investors were frozen to inactivity while others stiffened their courage to retain their investments and brazenly bought more common shares at bargain basement prices. These latter investors, subsequently, reaped the remarkable rewards of, arguably, the greatest stock market recovery in modern financial times.

Looking ahead I am heartened by what I see. Admittedly, there are numerous economic issues that have yet to be resolved. In addition, the North American economic recovery is sporadic and uneven with unemployment, in particular, a pesky problem. Interestingly, as I visit the shopping malls of South Florida and talk to waiters and cashiers, I do not detect the gripping fears of two Christmas’ ago. People are spending, perhaps not as quickly or as plentiful as hoped, but they are using all their ingenuity to recalibrate, refocus and make do as the worldwide economies bounce back toward prosperity. In short, we are relatively optimistic with regard to our outlook on both the economic recovery and common share prices. Our optimism is a function of numerous factors including:

• record low interest rates,
• continued monetary and fiscal stimulation,
• improving corporate earnings prospects with healthy corporate balance sheets that are probably in the best shape since WWII,
• considerable corporate and consumer pent-up demand for goods and services,
• trillions of dollars worldwide anxiously awaiting deployment in equity investments and,
• gradual recovery of the worldwide banking system.
  

Irwin A. Michael, CFA