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Thursday, May 20, 2010

Fear Back in Vogue, Social Unrest, Credit Risk, and Even Volcanoes - YET, Consider Fundamentals and Remember that Mr. Market is Schizophrenic

As we expected (noted in our 5/8 post with a brief warning to watch for DOW 5000 prognosticators), the doomsday crowd is back and fear/panic is taking control of the Market. For evidence, please see this Forbes article from Wednesday The Crash Camp Takes Over - OR - one of today's Yahoo! Finance (YHOO) headlines: Dow Slumps 3.6%: "We Are On Schedule for a Very, Very Long Bear Market," Prechter Says. We mentioned Mr. Prechter in a post last November and acknowledge that he has a seasoned perspective with well argued points.

In this regard, we're not naive or ignorant of mixed macroeconomic conditions and current events:
  • unsettling ecological disaster thanks to a horrific accident (lack of safety controls or oversight? mistakes? freak event drilling so deep? modern dependence on "black gold"?);
  • social unrest (Greece/Europe/Thailand/elsewhere?) underpinned by class warfare and/or necessary reductions in government expenditures (could be good thing over time if private enterprise can pick up slack);
  • high debt levels and seemingly irreversible deficit spending by most developed countries;
  • likely unsustainable entitlement programs (aging demographics might make earlier promises untenable though politically difficult to change);
  • higher taxes in many countries that may squeeze both consumption and investment, the latter of which is critical for economic growth and new job creation;
  • more jobs lost through corporate streamlining, mergers/acquisitions, or creative destruction (e.g. old media struggles);
  • and, even volcanic eruptions and earthquakes.
  • [fill in the blank on our non-exclusive list - you can probably think of other things].
Aside on volcano - this is well worth a listen for those interested in geological perspective on the Icelandic eruption: The Heat is on - Volcanic Activity in Iceland by Andy Hooper We pulled this directly from the WSJ site this evening and even left in a few negative headlines toward the bottom. Most are positive.

Volatility is a fact of the markets and psychology is a significant influence on market direction. Our hope is that positive fundamentals in many areas check the current trading bias toward negative psychology, stabilize market sentiment and provide confidence to businesses and consumers alike that the sky is not falling, as some might lead us to believe. Many things in the world are on track.

We don't know what the Market will do near-term, but continue to hang our hat on fundamentals of specific companies trading at sensible (or even inexpensive) valuations, including eBay (EBAY), PetMed Express (PETS), Seaspan (SSW), and Weight Watchers (WTW). All the while, we never forget Ben Graham's guiding parable that Mr. Market is invariably schizophrenic and subject to wild swings.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long YHOO, SOFO, EBAY, PETS, SSW, WTW.
© 2010 Jeffrey Walkenhorst
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