Archive for September, 2008

House Of Pain

Monday, September 8th, 2008
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Equity markets worldwide have been turned into torture chambers. Banks, property and construction have been strangled first, then commodities and now just about everything else is being ploughed under. It has become quite common to see individual blue chips drop by 10% on a single day. Companies which looked solid just a year ago have lost more than half of their value. It is painful for stock holders - and it won’t be fun for most others, either.

In terms of strategy, it’s probably wise to keep one’s powder dry for a while longer, although it might be tempting to pick up some cheap looking paper. The general air of panic in the air and the huge daily drops could mean a bottom is coming into sight. But some bottom pickers will end up with dirty fingers, that’s inevitable.

Our advice here would be to look at individual companies which are still good cash generators, have little or no debt and rely on a solid business model. Investors with a longer-term outlook can probably buy some of them right now. Dividend yields are looking reasonable when compared to interest rates. At least if you compare to safe investments like short-term treasuries. Of course it’s easy to gain high interest rate returns by buying junk paper. On some GM bonds, you can get clearly over 20% p.a., and on some issuers from countries whose name ends in “-stan”, probably more. But that’s for lovers of two-shot Russian roulette, not investors.

The dollar had a remarkable recovery over the last four weeks, up by about 10 % against the euro. It seems a new dollar up-trend has developed and, apart from the usual setbacks, will continue to perhaps 1.35 ( against the Euro).

With regard to the US elections, we stick to our previous forecast of a Republican win. But in any case, it will be a paper-thin win. If McCain wins, we expect defense, resources and pharma stocks to do well. In case of an Obama win, alternative energy plays and generic drug manufacturers (e.g. Teva) might do well. Whatever happens, the world is in recessionary mode, sentiment is gloomy and day-to-day life is no bed of roses. But out of deeply blue moods and abysmal events, something good might come. Super low interest rates will help, thank God and Bernanke.

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