Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 11/8/11

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With a grueling 20 hours of flying and two changes of plane out of the way, I’m finally back in Dublin. Given that there was a near total collapse in equity markets globally and social order in the UK while my other half and I were on honeymoon, I suspect that the moral of the story is to holiday closer to home next time!


So what has been going on? We’ve seen the US firstly lose its coveted AAA rating from S&P, and then go on to demonstrate that its leaders have learned nothing from other countries that have been downgraded by simply attacking the ratings agency while largely ignoring the ruinous policies that led to this ignominy. I was amused to see Tim Geithner accuse S&P of showing “terrible judgement”. This being the same Tim Geithner who as Treasury Secretary has watched the United States’ reported national debt increase from $10trn at end-fiscal ’08 to around $14.25trn today (he took over as Treasury Secretary in January 2009). Some readers may say “what about the debt ceiling deal?” in response to my use of the word “ignoring” above. I think that this word usage is perfectly fair, considering that, contrary to what some “nodding donkey” journalists would have you believe, the debt ceiling deal does little to arrest the US’ spiraling public debt. This article gives a good primer on why this is so. I highlight in particular this section:


An important distinction is that these cuts are not actually cuts in the budget, nor are they reductions in the deficit. The amount of government spending will, in fact, increase every year over the next ten years. Rather the cuts made in the deal are to future increases in spending.


Global equity markets have been in freefall as investors fret about a whole host of sovereign concerns, be it the US’ problems outlined above, Italian and Spanish funding worries and fears about France being the next country to be in the market’s cross-hairs. I do think some of the correction in the equity markets is overdone – at a time when corporate balance sheets have never been stronger, it makes no sense for funds to sell shares to buy the perceived “safety” of government bonds at a time when sovereign balance sheets have never been weaker. This is especially true when so many quality shares are trading on cheap ratings. Not that all of the money that has been pulled out of shares has gone into government bonds, mind you. Gold has continued to soar as risk averse investors flock to one asset Bernanke and Co. cannot print.


How does this end? Given the hysterical tone of much of the commentary out there, I wonder if we are reaching the point of capitulation in equity markets, which is when the smart money starts buying. Looking at the Irish market, data compiled by Sharewatch show that roughly a quarter of stocks have fallen by at least 20% in the past 30 days. Mike McDonough’s table shows that most of Europe’s largest share indices are officially in bear market territory, with declines of 20%+ from their recent peak. The backdrop is clearly horrible. But can it get significantly worse? I’m sympathetic to this view from Jennifer Hughes in the Financial Times:


Can [the market] fall further? Of course. But the market is not bottomless, if only that on a practical level fund managers cannot sit for very long on the cash they are pulling out. Looking at the sea of red, it will take guts to step in. But this is the time when reputations are made.


What I’m looking to add at this time are stocks with strong balance sheets and attractive dividend yields. On the latter, I was interested to read while on holiday that in the 3 months to July UK stocks paid out £19.1bn in dividends, a 27% yoy increase. Capita Research, which compiled this data, reckons that FTSE companies will pay out £66bn to investors this year, the highest level seen since 2008. One thing this pullback has given investors is a far bigger shopping list of inflation-busting dividend yield stocks to consider. This is something I’ll write about more once I’ve gotten over the jetlag! However, for now I’ll leave you with one other thing to consider. One of the things that featured on my honeymoon reading list was Joel Greenblatt’s “The Little Book That Still Beats The Market” (which I wisely concealed below a few Clive Cussler books in my suitcase while packing!) that included this line which I think is especially relevant in these troubled markets:


Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.


Written by Philip O'Sullivan

August 11, 2011 at 2:30 pm

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