There's an endless choice of quality businesses trading at or near liquidation prices.
We have plunged into the worst financial crisis since the 1930s. The leadership of Treasury Secretary Henry Paulson and Federal Reserve Chief Ben S. Bernanke in fighting it has been sluggish and inconsistent. Although we've just elected a new President and Congress, they will take time to develop policies to stimulate the economy and promote liquidity. What's an investor to do?
First, do not flee the market by selling your quality stocks. Yes, it's the worst bear market since 2000--02, and stocks are trading at valuations not seen in decades, but equities will come back. Second, because credit is subject to unpredictable crunches and it's impossible to guess when this bear will end, don't buy on margin. Third, don't hold shares of companies that will need cash to expand or refinance. There is a good chance they won't be able to borrow.
Fourth, keep your bond maturities very short. When governments face economic crisis, they print money. The magnitude of this crisis suggests that the printing presses will be running around the clock for some time. That means we'll see serious inflation when we emerge from the recession. Long-term bond prices could then drop even more than equities already have dropped. Stocks, by contrast, hold their own over long stretches of inflation.
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Showing posts with label Stock Market. Show all posts
Showing posts with label Stock Market. Show all posts
Monday, November 24, 2008
Friday, October 10, 2008
Dodge & Cox: Market Commentary and Outlook
The U.S. capital markets continue to experience a period of extraordinary turmoil, marked by liquidity and credit concerns in the financial sector and a series of government interventions. This has been a difficult period for our clients and investors in the Dodge & Cox Funds. As fellow Fund shareholders, Dodge & Cox employees share in the recent disappointing results. We believe that the fear and uncertainty currently gripping the financial markets mask the long-term prospects for global growth, and we see opportunities to benefit from this disconnect.
Market turmoil is nothing new for Dodge & Cox, as we have managed investments since 1930. In the last two significant banking downturns (early 1980s and 1990-91) banks experienced difficulties due to asset quality and funding concerns, and their stock prices fell to low levels. During those periods, many banks failed and the industry
consolidated. However, banks with strong, long-term business franchises survived and ultimately flourished during the subsequent recovery. It was not a case of the regulators bailing out systemically important banks during those prior downturns, but rather providing banks with the breathing room and flexibility needed to overcome temporary challenges.
The current credit cycle, beginning in the summer of 2007 but worsening recently, has proven to be similar in some ways but different in others. The lack of confidence in the financial system worldwide has severely constrained credit and capital flows, resulting in a series of bank failures in the U.S. and Europe. Mark-to-market accounting (which did not exist to the same extent in the 1980s and 1990s) has required banks to value distressed assets at the prices established by desperate sellers. This, in turn, has led to an unprecedented need by many financial institutions to raise capital in a short period of time, and has exacerbated the crisis of confidence in the financial system.
Read the full article
Market turmoil is nothing new for Dodge & Cox, as we have managed investments since 1930. In the last two significant banking downturns (early 1980s and 1990-91) banks experienced difficulties due to asset quality and funding concerns, and their stock prices fell to low levels. During those periods, many banks failed and the industry
consolidated. However, banks with strong, long-term business franchises survived and ultimately flourished during the subsequent recovery. It was not a case of the regulators bailing out systemically important banks during those prior downturns, but rather providing banks with the breathing room and flexibility needed to overcome temporary challenges.
The current credit cycle, beginning in the summer of 2007 but worsening recently, has proven to be similar in some ways but different in others. The lack of confidence in the financial system worldwide has severely constrained credit and capital flows, resulting in a series of bank failures in the U.S. and Europe. Mark-to-market accounting (which did not exist to the same extent in the 1980s and 1990s) has required banks to value distressed assets at the prices established by desperate sellers. This, in turn, has led to an unprecedented need by many financial institutions to raise capital in a short period of time, and has exacerbated the crisis of confidence in the financial system.
Read the full article
Should Global Stock Markets Shut Down to Cool Off?
Stocks could close lower today for the eight consecutive session, as a wide-ranging loss of confidence has taken hold of markets. Is it time stock markets to close for a few days and take a breather?
There are circuit breakers in place to shut down stock markets when a bout of selling looks like a panic, but they are all intraday measures and, despite large point declines, markets haven’t really come close to those levels. The circuit breakers also don’t close the markets more than a day. For the New York Stock Exchange to close for the day, the Dow Jones Industrial Average would have to fall 3350, or 30% of the average closing value of the DJIA for September.
The Dow industrials have dropped 21% through Thursday, as the market selloff hasn’t shown itself as an obvious intraday panic, but a slow steady decline in confidence. More troubling is that nothing has seemed to cheer markets. Markets have declined following major moves in the last few days, including Congress’s passage the Treasury Department’s troubled asset relief program, the Federal Reserve’s announcement that it will purchase commercial paper and even a coordinated global rate cut.
Part of the problem has been that programs like the TARP and the Fed’s acquisition of commercial paper will take time. Markets might see some relief once those programs start moving. If markets were to close until then, confidence might return to markets when they were reopened.
“The only rational cause for shutting markets is if the [group of seven leading countries] believes it can come to a coordinated set of policies that would address the situation in conjunction with the TARP getting up and running,” said Joseph Brusuelas of Merk Investments.
However, he warns that any action must be globally coordinated by the G-7. If U.S. markets were to close by themselves, market losses would just move offshore. Brusuelas suspects that if G-7 markets close, the secondary markets would follow suit. G-7 finance ministers meet today in Washington, and Bloomberg reports Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the markets while they “rewrite the rules of international finance.” However, Berlusconi later played down his comments.
Any closure has to come because governments believe they have a solution. A shut down without a coordinated policy response during that time would just put off the pain until markets were to reopen.
Closing stock markets isn’t without precedent. The NYSE was closed from March 4-14, 1933 for FDR’s “bank holiday” during the Great Depression, and it shut it doors again from Sept. 11-17, 2001 following the terrorist attacks in the U.S.
Link to the original article
There are circuit breakers in place to shut down stock markets when a bout of selling looks like a panic, but they are all intraday measures and, despite large point declines, markets haven’t really come close to those levels. The circuit breakers also don’t close the markets more than a day. For the New York Stock Exchange to close for the day, the Dow Jones Industrial Average would have to fall 3350, or 30% of the average closing value of the DJIA for September.
The Dow industrials have dropped 21% through Thursday, as the market selloff hasn’t shown itself as an obvious intraday panic, but a slow steady decline in confidence. More troubling is that nothing has seemed to cheer markets. Markets have declined following major moves in the last few days, including Congress’s passage the Treasury Department’s troubled asset relief program, the Federal Reserve’s announcement that it will purchase commercial paper and even a coordinated global rate cut.
Part of the problem has been that programs like the TARP and the Fed’s acquisition of commercial paper will take time. Markets might see some relief once those programs start moving. If markets were to close until then, confidence might return to markets when they were reopened.
“The only rational cause for shutting markets is if the [group of seven leading countries] believes it can come to a coordinated set of policies that would address the situation in conjunction with the TARP getting up and running,” said Joseph Brusuelas of Merk Investments.
However, he warns that any action must be globally coordinated by the G-7. If U.S. markets were to close by themselves, market losses would just move offshore. Brusuelas suspects that if G-7 markets close, the secondary markets would follow suit. G-7 finance ministers meet today in Washington, and Bloomberg reports Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the markets while they “rewrite the rules of international finance.” However, Berlusconi later played down his comments.
Any closure has to come because governments believe they have a solution. A shut down without a coordinated policy response during that time would just put off the pain until markets were to reopen.
Closing stock markets isn’t without precedent. The NYSE was closed from March 4-14, 1933 for FDR’s “bank holiday” during the Great Depression, and it shut it doors again from Sept. 11-17, 2001 following the terrorist attacks in the U.S.
Link to the original article
Thursday, October 2, 2008
Fidelity's Anthony Bolton calls bottom of stock market
Anthony Bolton, London’s best-known stockpicker, said yesterday that he had never seen retailing and media shares looking so cheap and that he had begun to put his own money into the equity market at the height of the current financial crisis.
Mr Bolton, president for investments at Fidelity International, said that the UK stock market seemed to be at or near the bottom and he had become much more optimistic in the past two weeks. “Shares [in some sectors] are as cheap as I’ve seen them in my lifetime,” he said, citing consumer cyclical sectors such as retailing and media as particular bargains.
After pausing several years in adding to his stock market investments, he said he had put fresh personal money into Fidelity equity funds two weeks ago and on Monday – the day the US bank bailout plan was derailed. “For the first time in a couple of years, in the last few weeks I’ve started to feel optimistic,” he said.
Mr Bolton made his reputation as the stockpicker behind the Fidelity Special Situations Fund. Between its launch in 1979 and 2007, when he stood down from running it, he multiplied investors’ money 147 times. He rose to prominence when he orchestrated the ousting of Michael Green as chairman-designate of ITV, and acquired the nickname “The Quiet Assassin” – a moniker he detests.
Mr Bolton told guests at a City lunch yesterday that the rally in markets would not be dramatic. “It’s going to be a protracted and slow upturn,” he said.
The bear market had gone on too long and, at 15 months, was already “long in the tooth” compared with previous share market slides. “In the last two weeks we have looked into the abyss that you get at the bottom [of each bear market],” he said.
Sentiment was so poor, Mr Bolton suggested, that the only way was up. Companies with low leverage would do well, he predicted. Measured by price to book values and enterprise value to sales ratios, many shares were egregiously cheap.
Media shares had underperformed the stock market for seven years, and it was time to buy them, Mr Bolton argued. A broad basket of financial stocks was also attractive. “I’ve got concerns about all the banks, but a lot of those concerns are already reflected in the price,” he said.
Mr Bolton said that investors in banks had been wrongfooted by banks’ opacity and huge off balance sheet assets and liabilities, which made them hard to analyse. “I’d never heard of SIVs [before May 2007],” he said. “I didn’t know they existed.” SIVs, or structured investment vehicles, were the huge off balance sheet funds through which banks invested in complex, and sometimes toxic, structured credit assets.
Mr Bolton said there did not have to be a big trigger for a turning point, although a US bailout might help. “It can just be when people stop selling,” he said. He preferred shares in developed markets. It was too early to buy in emerging markets.
Link to the original article
Mr Bolton, president for investments at Fidelity International, said that the UK stock market seemed to be at or near the bottom and he had become much more optimistic in the past two weeks. “Shares [in some sectors] are as cheap as I’ve seen them in my lifetime,” he said, citing consumer cyclical sectors such as retailing and media as particular bargains.
After pausing several years in adding to his stock market investments, he said he had put fresh personal money into Fidelity equity funds two weeks ago and on Monday – the day the US bank bailout plan was derailed. “For the first time in a couple of years, in the last few weeks I’ve started to feel optimistic,” he said.
Mr Bolton made his reputation as the stockpicker behind the Fidelity Special Situations Fund. Between its launch in 1979 and 2007, when he stood down from running it, he multiplied investors’ money 147 times. He rose to prominence when he orchestrated the ousting of Michael Green as chairman-designate of ITV, and acquired the nickname “The Quiet Assassin” – a moniker he detests.
Mr Bolton told guests at a City lunch yesterday that the rally in markets would not be dramatic. “It’s going to be a protracted and slow upturn,” he said.
The bear market had gone on too long and, at 15 months, was already “long in the tooth” compared with previous share market slides. “In the last two weeks we have looked into the abyss that you get at the bottom [of each bear market],” he said.
Sentiment was so poor, Mr Bolton suggested, that the only way was up. Companies with low leverage would do well, he predicted. Measured by price to book values and enterprise value to sales ratios, many shares were egregiously cheap.
Media shares had underperformed the stock market for seven years, and it was time to buy them, Mr Bolton argued. A broad basket of financial stocks was also attractive. “I’ve got concerns about all the banks, but a lot of those concerns are already reflected in the price,” he said.
Mr Bolton said that investors in banks had been wrongfooted by banks’ opacity and huge off balance sheet assets and liabilities, which made them hard to analyse. “I’d never heard of SIVs [before May 2007],” he said. “I didn’t know they existed.” SIVs, or structured investment vehicles, were the huge off balance sheet funds through which banks invested in complex, and sometimes toxic, structured credit assets.
Mr Bolton said there did not have to be a big trigger for a turning point, although a US bailout might help. “It can just be when people stop selling,” he said. He preferred shares in developed markets. It was too early to buy in emerging markets.
Link to the original article
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