Quarterly Investment Commentary and Analysis
Like the two quarters preceding it, the fourth quarter was a rocky quarter. The investment world just can’t decide what to make of the sub-prime lending mess and its effect on the market. If Wall Street is feeling good (the Fed cut rates), the market is up. If Wall Street is feeling bad (more bad news about housing or poor earnings), then the market is down.
Why is the market getting yo-yo’d around by the daily news? Investors are supposed to make good decisions based on long-term fundamentals of the corporations and the industry. If a product is becoming obsolete, such as film, the company is going to have a hard time bringing value to its shareholders. Kodak’s stock price, for instance, has fallen from $85 to $19 per share in the last 10 years, and it’s pretty much been a straight decline.
There are two reasons: 1) narrowed expectations and 2) investor confusion. In today’s world, we have come to expect things immediately. We have fast food, Jiffy Lube, and instant access to news and information on the Internet. Patience is a virtue that is becoming harder to find. Because of that, investors are seeking immediate returns. In bygone days, investors would buy stocks and hold onto them for years, patiently waiting for the value to be built by the company.
Today, there is always a stock that is growing faster than the one you are holding now. There is always a hot Internet or biotech play. Growing companies slowly and meticulously is not exciting enough for the video game generation. Investors jump from stock to stock believing that the next buy will make them rich. This leads the market to be very erratic. Sadly, like the Gold Rush of 1848, the people making most of the money are those selling the mining tools.
Expectations for immediate returns and lack of patience in a good investment strategy cause a lot of cognitive dissonance in investment professionals. They want to invest in good companies, but fear losing money if the market goes down and seek ever higher returns in the next hot stock.
The long-term investors are not sure what the housing and mortgage crisis are going to do to various companies and industries. The sub-prime mortgage mess is likely to lead to bankruptcies and acquisitions of even the largest companies. Without a clear picture of the exposure to mortgages, any financial company is suspect. Without a clear picture of the toll that the credit crunch is likely to take on the American pocketbook, any retailer is suspect.
Housing prices in November dropped 8.4% since the previous year and the number of foreclosures increased by 79%. The people who are subject to these changes are unlikely to be driving the economy significantly, even with an economic stimulus package. In my opinion, we will find out mid-summer that we were in recession (negative real economic growth for two or more successive quarters of a year) during the last quarter of 2007 and first quarter of 2008.
In general, I think that people have burned through the equity in their homes and are currently running up their credit card debt. Many consumers won’t be able to pay off either and there will be some crunch in the consumer sector. Any large purchases that can be put off, will be.
I do think that this rough patch in the economy will affect the election. When people are feeling rich, they tend to vote with their hearts. When they are feeling poor, they vote with their wallets. Look for someone fiscally conservative in the White House next year.
So what does all this mean? As I have said before, it’s darkest before the dawn and things have gotten pretty ugly on Wall Street. About halfway through this earnings season will be the time to buy stocks (February/March). It will literally look like the world is coming to an end in the stock market, but as the earning season wraps up, the bad news will be in the market and the stocks will be cheap.
There is still a huge amount of liquidity in the market. The developing countries continue to grow and are interested in our assets for purchase. Upcoming retirees are still pouring their retirement savings into the market and will be looking for places to put their funds. For the next few weeks, cash and bonds will hold the upper-hand on the market, but following that, the time to test the stock market waters will come.
2 Responses to “Quarterly Investment Commentary and Analysis”
February 2nd, 2008 at 7:39 am
I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.
Tim Ramsey
February 5th, 2008 at 7:37 am
[...] Quarterly investment commentary and analysisAnalysis of the current stock market. Submitted: 1 minute ago Category: News Submitter: RssFeed Website: cfoyourself.com Report this link: Click here to report Comments: 0 [...]
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