The Market's Bouncing Big
September 18, 2008
– Comments (10)
Were you buying yesterday, or pulling up stakes like everyone else?
I was too busy with work to get orders in, but I have been dangling lowball offers all week because you can really smell the panic these days. (Some have tripped.) When your relatives start calling you to ask if they should take their money out of banks, you know the fear is rampant. When fear is that widespread, you know people aren't thinking straight.
It's uglier now than it's been for a while, but I've been buying throughout the recent cycles of turmoil, and encouraging others to do the same. (Don't look to my Caps scorecard for those kinds of investing ideas, by the way. I play the gut in Caps, and suffer or succeed in the pain-free virtual environment.)
Let's lay out a few broad hypotheses that inform my "steady as she goes" investing program:
1) World economy. Sure, things will slow, but does anyone really expect major infrastructure and development to dry up in Asia and anywhere (I'm thinking African nations here) that gets some of the Chinese Halo effect? Think they won't need heaps of metal and fuel? Me neither. I'm looking more and more at providers in those areas, equipment makers, oil services, and other companies that have recently been hammered.
2) The giant pool of money. OK, we all know the "giant pool of money" was partially responsible for the amazing worldwide credit bubble that centered on housing and various mortgage-backed derivative securities. This giant pool of money still exists, and it's looking for returns. I submit that long term, one of the places it must go is into U.S. equities, as we have some of the strongest multinational corporations in the world, and -- financial industry meltdown notwithstanding -- some of the best regulation and transparency you can find. The money's hunkering down now, but it will be back.
3) What recession? Don't get me wrong, I think we've got a recession, or something close enough that we need not parse words. But I still believe it's a different kind of recession. They're all different, of course, and I read a great article a while back that explained that each is the deflation of a bubble in a specific sector or sectors of the economy. There are halo effects of course, but everything doesn't suffer the same degree of pain. People who talk about this new Great Depression haven't paid much attention to the old one. Consumers will be pinched, but the likelihood that they are decimated as they were in the 20s is next to zero. We live in a time when food costs and other necessities, even after recent inflation, still represent a much smaller portion of income. In other words, it would take something a lot scarier than what we're seeing now to get us to GD2. That, in my opinion, means consumer-facing companies will not see demand drops of the magnitude that many fear -- and that fear is now priced into plenty of great companies' stocks.
4) Things are really different this time. Back in the good old days, recessionary environments absolutely creamed companies as inventories and other stagnating working capital twiddled their thumbs while fixed expenses chopped businesses to bits as revenues dropped. Today, major manufacturers are much leaner and meaner than in years past, and more flexible staffing and supply-chain management tend to mitigate risks that, in times past, led much more quickly to business-killing liquidity issues. This smarter management isn't everywhere, of course, but as investors who look at the trees, not the forest, I'm confident we can find the companies that stand the best chance of surviving in the upcoming and ongoing storm.
Anyway, I think those four themes help explain why I don't feel any panic at all these days, despite the fact that I've got what for me is a giant pool of money bouncing around the market. I'm actually very enthusiastic about the opportunities we're seeing, and will likely continue to see. But then my eyes are focused several years down the road. If your time frame is next week, you'll need to get your comfort from someone else.
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