It Isn't Time to Panic Yet

 | Jan 30, 2014 | 2:30 PM EST  | Comments
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Stock quotes in this article:

ap

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rell

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laco

Listening to the financial news last evening one would think that the world was ending and we were in the middle of a full-fledged crash in the stock market. We had another sharp down day Wednesday and the news was full of talk of additional Fed taper. The Turkish lira, China's somewhat disappointing PMI numbers and other horrible news that threatens to shake the very foundations of the world has dominated the news. Emerging markets continue to unravel and Europe was trading down again this morning. Only Facebook (FB) is saving the U.S. markets today.

One would think we were down at least 10% in the U.S. market in the past week. But a quick look at the charts (only after being careful that no one sees me looking at charts), I see that this is not quite the case. The S&P 500 is just 4% off all-time highs so far. The Dow Jones Industrial Average has fallen by a little more than 5% for the highs while the Nasdaq is off by as stomach churning 4.5%. We have gotten so used to a consistently rising market that any sort of decline that lasts more than a few hours has become a cause for concern.

I am not going to deny that conditions are ripe for this to continue and possibly get worse in the weeks and months ahead, despite today's market run-up. The fact that the Chinese government has released data showing growth is slowing is worrisome for emerging markets, as well as all the economies around the world that sell stuff to China .Emerging markets are getting very messy with capital fleeing the smaller, less stable nations of the world. The currencies of nations like Argentina and Turkey are in a free fall and that is disconcerting. The "fear" index, or volatility index as most of us call it, has jumped by almost 50% in the past week or so. The Fed is taking the punch bowl away and I sincerely doubt it will return t anytime soon.

I can give you many reasons why the stock market might collapse in the near future, but let's focus on the reality of the situation. It has not collapsed yet. As I am in the reaction business and not the prediction business, that's critically important. It is not time to panic, and it is certainly not time to buy the dip or aggressively add to my portfolio. We are only down a little from new highs and no new safe and cheap inventory has been created so far. Mr. Womack is still back on the farm and the old men have not yet broken out their canes to hobble down to Wall Street.

When I ran screens looking for safe and cheap stocks this morning, I did not see much value creation. I ran my Walter Schloss-based screen first to see in of those stocks had cratered enough to buy. Richardson Electronics (RELL) is down a little more than 3% for the week but is still up slightly year to date. If you do not own the company, you might want to pick up shares here as it is too cheap not to own but it is not at the point where I would add to existing positions.

Lakes Entertainment (LACO) has dropped by a whopping 2.75% during the last week but most of the stocks are flat to down on the week and is not time to add to positions just yet. No new stocks have fallen enough to match the criteria established by the legendary investor.

When I look at my list of perfect stocks, I see that not much is happening with my list of profitable dividend-paying companies with strong balance sheets that trade for less than book value. Ampco-Pittsburgh (AP) is down close to 5% on the week and if you do not already own it this might be a decent entry point, but it is not time to add to existing stakes in the company. The other thing I noticed about this screen is that it contains just eight stocks, the lowest number I can remember seeing in a long time.

I could perform the same exercise with all the screens I use but I think you get the point. The market is down a bit and the headlines are scary, but we are barely at the point of a little "nervous," and "maximum pessimism" is a long way from the current situation. Ignore the noise and focus on what is safe and cheap and you will see very clearly that not much has happened yet and there is nothing going on in stock prices that we can react to just yet.

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