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Wednesday, June 9, 2010

Maria Bartiromo Says "Get Out of the Way" - We Say: There's Always Something to Worry About, Stay Focused

We watched NBC Nightly News last Friday and happened to catch Maria Bartiromo's one minute market update. After a quick synopsis of various, well-known negative data points -- "So much nervousness for investors to digest" -- her conclusion: my advice would be to "get out of the way" of this "a nervous period." In other words, stay on the sidelines or sell now and come back later.

She may well be right -- maybe the market will remain on a downward path; who knows for sure? Yet, the world always has problems. If it's not one thing, it's another, with media and market pundits fueling the currents on the upside and the downside. In this way, mainstream media often spoon feeds the buy-sell-buy-sell mentality where investors only "rent" rather than "own" stocks in hope of making a quick buck in days, weeks, or months.

In our view, the short-term truly is a gamble and making real money with this casino mindset is near impossible. From our own experience, aside from the "easy money" of 2009 made across nearly all sectors and in especially exceptional recoveries for companies such as Dollar Thrifty Automotive Group Inc. (DTG), most money is made over the course of years, not months or even a year or two.

This again brings us back to advice from the late Philip Carret, who we can't help but keep mentioning in our posts. Some of his guidance from the insightful 1999 article (previously shared):
  • "Pick stocks for what they'll do in the coming years, not the coming weeks. Only invest in stocks you think are going to be worth more in five years. Never mind what the stock is going to do next week or in the next few months.
  • If you buy stocks because of what you hope will happen next week, you are trying to be a market timer. I never knew anyone who could time the market consistently, so why even try?
  • How do you know if a stock will be worth more in five years? You don't. But the odds favor the stock being worth more in five years if it is from a company with a good track record, where the management owns a significant stake in the company and the balance sheet is strong."

So refreshingly sensible and akin to our approach at Common Stock $ense.

Back to Ms. Bartiromo - if you listen to the clip, you'll hear her hedge her bets by also saying something to the effect that you need to have confidence in America and we'll pull through this. We're not sure what she was saying several months back, but we suspect she might have been more sanguine when overall market sentiment was more favorable prior to the Greek crisis and the oil disaster. No question, market psychology and commentary can turn on a dime.

In fact, it's possible that several months from now, the Market will embrace "The Bullish Case for U.S. Equities" espoused by Bob Dole of BlackRock in his 6/8/10 WSJ opinion article. Some may say, "hey, he's an equity guy only talking his own book," yet his views appear balanced and consistent with our recent commentary highlighting favorable corporate fundamentals. A few excellent points directly from his article that few seem to be paying attention to:
  • At the beginning of this year, the consensus expectation for 2010 U.S. GDP growth was around 2.6%. Today it is 3.5%. Expectations for Europe have slid to 0.5%-1.5% from 1.2%-2%. Cyclical recovery appears much stronger in the U.S. than in other developed economies, creating an important tailwind for our stocks.
  • What about emerging markets? The largest of the emerging economies (Brazil, Russia, India and China) have advanced their global GDP share to 15% from 7% since 1995. But their relative economic expansion has come at the expense of Europe and Japan—not the U.S. Fifteen years ago, the U.S. accounted for 25% of global GDP. Today? Still 25%. Europe's share, however, has fallen to 21% from 25%, while Japan's has plummeted to 9% from 18%. What's more, emerging market prosperity is to our advantage: It hinges on increasing domestic demand that translates into a larger market for U.S. goods and services.
  • Corporate profits could reach a new record high in this year's third quarter. Free cash flow for nonfinancial American companies is also exceptionally high—cash on the balance sheet is close to 11% of assets, a 60-year high. And high cash levels are already generating dividend increases, share buybacks, capital investments and M&A activity—all extremely shareholder friendly.
To Ms. Bartiromo's credit, she's right - things may not be fantastically great. Yet, things really could be much worse and, as Mr. Dole points out, there are numerous positives to consider. Also, remember that lower equity prices imply more available bargains -- it's always better to buy merchandise when it's on sale. Even better if it's severely marked down.

Happy investing,

Jeffrey Walkenhorst

Disclosure: n/a.

© 2010 Jeffrey Walkenhorst
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