“More important than predicting the future is understanding what the market thinks will happen.” – Eric Bushell

 

Have you noticed that almost every day recently the news is about a fear of something new that will not happen?

We have actually had more concerned calls than in 2008. The constant negative news makes it hard for most people to sort out the actual seriousness of the situation.

The next article is the Fear of a False Factor is Favourable – II (Long Answer)

Here is a short answer to our opinion of what is really going on.

 

List of recent market fears:

First there was the issue of increasing the US debt ceiling, the issues in negotiating it, the downgrade of their credit rating, whether the US is able to pay all its debts and the list of deficits (budget, trade, employment, social security, etc.). Then we went through a series of European countries (Greece, then Spain, then Italy, then France), whether they could pay their debts and whether the European Union will survive. Then came the fear of the “double-dip recession”.

Now the permanent pessimists think they are finally right. There are the permanent gold bugs (“The US dollar will lose its value. The only safe investment is gold or silver.”), people that dislike Americans (saying with glee “The US is finished!”), and the permanently pessimistic “perma-bears” (“It is mathematically impossible for the US to pay its debt”, we will get deflation or hyper-inflation or both, there are government conspiracies, we have run out of oil, etc.).

Oh my God, are we all doomed???

Specifically, is it safe to be invested?

Our opinion: NONE of these things will actually happen.

We have been meeting with a series of our fund managers and pouring over their commentary to help us understand what is really going on. Some have connections to the top finance and government decision-makers and all are very knowledgeable and experienced about the markets. Based on insights from our fund managers and a lot of other reading, here is our opinion about what is really happening.

 

SHORT ANSWER

  1. This is nothing like 2008. The underlying fundamentals are sound. The US has a huge economy with huge powers to collect tax and is easily able to pay its bills. Europeans have a deep drive to maintain the Euro. They are very creative and will support all the countries in the European Union.

The markets are only down roughly 10% year-to-date. Two weeks ago, we had a 4+% drop on Monday and Wednesday, but a 4+% gain on Tuesday and Thursday. The market is confused.

2. The issues in the US and Europe are primarily political issues, not financial issues. The markets have been irrational, fed by rumours and fears, NONE of which we think will happen.

3. The companies in the stock market are in great shape. Everyone seems to have forgotten that we are not investing in the economy or the government – we are investing in companies. Companies have not been this financially sound in decades. Profits of the largest companies are at an all-time high ($100.07/share). Stocks are very cheap (11.52 P/E) and they have tons of cash.

For long term investors, this is what great buying opportunities look like – overly pessimistic markets combined with very strong company fundamentals. “Be fearful when others are greedy and greedy when others are fearful.” 2

The current price of stocks is based on what most investors think will happen. There is a buying opportunity when the market is too fearful of things we are confident will not happen.

The long term growth of the stock market will continue to reward those that have faith and patience.

Remember the 4 Fs: Fear of a false factor is favourable.

 

Ed

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