As I am writing this, the market is down for its second day in a row. Historically, the market (i.e. a collection investor opinion) does not like the uncertainty surrounding government policy, interest rates, income taxes, the economy and the impact on corporate earnings.
As such, the market doesn’t voice its opinions at the voting booth; it voices it in the up or down movement of security prices. None of us wants to face making a major purchase (e.g. a new car) in the midst of company layoffs. As such, businesses don’t like making hiring, new equipment or other plans when faced with a shifting landscape. This uncertainty weighs heavily on analysts and ultimately investors, which results in them reducing their perceived value of company stocks (i.e., lower stock and bond prices).
Today’s hot story is the government’s potential, corrective action against Wall Street firms’ and large banks’ for their roles in the housing bubble, market and economic meltdown.
- Separately, the following are just a few nuggets taken from this week’s headlines:
- Wells Fargo, one of the largest banks in the U.S., sees signs of life in consumer lending
- Home construction dips four percent in December; wholesale prices up 0.2 percent
- World Bank: global recovery may wilt as stimulus fades; funds scarce for developing countries
- China’s growth accelerates to 10.7 percent in 4th quarter, adding pressure to fight inflation
- Stocks fall as China clamps down on bank lending
All of the above may be why Warren Buffett said this week that the U.S. economy is suffering from past excesses and won’t recover quickly. In prior years many people and companies spent beyond their means and “the hangover is sort of proportional to the binge.” On the flip side of the coin, Tom Hoenig, president of the Federal Reserve Bank of Kansas City, said last week that he relies on the “preponderance of evidence” about the economy’s path. He sees the economy tipping toward a much stronger recovery than most do.
Just like children, the stock market likes certainty. If it perceives too much change and can’t get a clear picture of what lies ahead, then it will lose momentum until clearer skies prevail. As this year progresses, businesses will get a better understanding of the landscape ahead (good or bad). Ultimately, they will adjust accordingly and proceed forward. Once this occurs, confidence will return to the market and the economy, unfortunately, we may see some wild swings until then.
Believe me, as bad as it was and may still be for many, there are that many or more businesses digging in for the long-term and are emerging even stronger and more competitive as a result.
Many of these business owners and their staff live by the motto, “I have not yet begun to fight,” and it is that type of unbridled determination that allows me to continue to have faith long-term in the U.S.
One fund company’s investment strategy through all this uncertainty
I listened to a recent conference call with First Eagle’s Global and Overseas Fund portfolio managers, two of our larger investment holdings. Without going into great detail, the following were some of the main themes:
They are using gold and precious metal mining stocks as insurance against economic uncertainty.
- They came through the recent bear market very well in comparison to their peers, which is a testament to them not changing their investment strategy one bit during all the short-term turmoil.
- Currently, they don’t believe that overall U.S. stocks aren’t under or over-valued, but priced appropriately for the current economic environment.
- In Japan however, they are finding companies priced below their net worth and some trading at the cash they have on their books.
- They try and invest in companies that either have strong growth fundamentals or their stocks trade at prices below their net worth. In either case, they avoid companies that are over reliant on borrowed money, or industries that are experiencing tremendous and unsustainable growth (bubbles) long-term.
- They did mention that China and India and other emerging economies offer great growth prospects long-term. However, they did voice concerns about China’s explosive growth in bank lending, real estate and stock prices. Too much of a good thing can be bad for you, which is why the Chinese government is restricting future bank lending to try to let some air out before another bubble pops.
Both First Eagle Global and Overseas incurred losses in 2008; however, the funds respectively returned 7.96%/year and 11.38%/year for the 10-year period ending 12/31/2009. During this same period the S&P 500 returned -0.95%/year. This is a true testament to the objective, unemotional and analytical investment style the portfolio managers’ practice and is exactly what is needed in the type of stock market environment we are experiencing.
Quotes
“The risks of luxury must be balanced against the costs of necessity and proof of utility.”
Arthur C. Frantzreb, philanthropic consultant
“Money is like sea water. The more we drink, the thirstier we become.”
Arthur Schopenbauer, philosopher
“Who is wise? He that learns from everyone. Who is powerful? He that governs his passions. Who is rich? He that is content.”
Benjamin Franklin, printer, diplomat, scientist
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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