Investing: A Ball of Confusion
Bottom is unclear, yet opportunities exist.
"Fear in the air, tension everywhere, unemployment rising fast… And the band played on"
--Ball of Confusion – The Temptations
Yes I know using lyrics from The Temptations kind of dates my musical career but after last month's emotional roller coaster I had to dig into my vinyl collection for some relief.
As is typical in times of stress and confusion the talking heads pour out of your television set to proclaim the bottom or scare you with comments that the grim reaper is at hand. It's great entertainment and if it promotes discussion and debate I suppose some good can come of it.
Investing is a cold analytical process devoid of emotion or at least it should be. We look at facts, examine trends, crunch numbers and put together a matrix of information to help us with security selection and asset allocation. Boring stuff but someone has to do it.
Earnings for the second quarter are not telling the whole story. Some industrial stocks like Flowserve (FLS) and SPX Corp (SPW) are reporting blow out earnings only to watch their stocks get pummeled immediately or lose their gains in less than 36 hours. The market seems to be sending a message saying that these earnings are not sustainable and they're at the end of the line.
Financial stocks rocked from oversold levels with earnings beats from big cap names like Wells Fargo (WFC) and JPMorgan (JPM). When you drill down, not a lot had changed other than management modestly beating lowered expectations. Perhaps the best news from the financial sector came from Merrill Lynch (MER) which hit the bid and sold some troubled assets. The terms of the deal were certainly not great and perhaps suspect given the fact it is financing 75% of the transaction but now we have some price discovery. We have prices that buyers are willing to step in and buy troubled assets.
So what do I conclude with this newfound wealth of information?
"Oh great googamooga can't you hear me talking to you?
--Just a Ball of Confusion" –The Temptations.
Whenever the picture isn't clear I put together a balance sheet of Assets and Liabilities to help me bring it into focus.
Market Balance Sheet
Credit Crisis has appeared on the cover of most major news magazines.
- Stock prices reflect a lot of bad news.
- Banks and Brokers continue the clean up.
- Oil prices have moderated – taking some pressure off the consumer.
- World markets are rolling over – they seem to have caught the cold.
- VIX (Volatility Index) never made it to 2002 levels.
- No sign of investor capitulation.
- Housing has not bottomed.
- Stocks gapping higher on good earnings and closing below previous day's close.
- Oil prices have moderated – Demand destruction could be signaling global slowdown.
Conclusion: There's not enough here to call a bottom but there are plenty of stocks screaming to be bought. On the heels of its merger Activision Blizzard (ATVID) had another great quarter. I can attest to the fact that the gaming industry for kids is booming as I find it close to impossible to tear my son away from the Xbox screen. Symantec (SYMC) has reported back to back blow out quarters as it continues its turn around. At 14x it's still cheap. While there is no shortage of companies turning in dismal performance, for those willing to dig there are gems in the rough.
Opinions are meant to be changed when the facts change. I will change mine in a New York minute if the facts support it.
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