Where the Bargains Are

 | Jun 24, 2013 | 4:00 PM EDT
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I have said a thousand times that I do not predict market action, but it is hard to deny that it has been a tad ugly the past few weeks. The stock market has fallen more than 5% from the highs and interest rates have been moving up on the long end of the curve. Observers are split between two camps. We are either on the verge of a total 1987-style crash or this is a great buying opportunity. The crash camp seems to be growing but, as usual, I have no idea which theory is correct. If history can be relied on as a guide, the truth falls between the two extremes.

This morning I looked at a list of stocks trading down and at or near new 52-weeks lows. If this is a huge inventory-creation event, this is where the bargains will make their first appearance. Over the years, I have found that careful study of the new-low list provides not only stock ideas but clues to what is going on in the world and the financial markets. I looked specifically for stocks that have fallen to the point that they are now trading for less than book or asset value to see if there any bargains worth considering.

A few clear trends are worth mentioning. I wrote on Friday that markets close to some measure of maximum pessimism are precious metals miners and Brazilian equities. The list of new lows is littered with names from these two asset classes. I have a few positions in each and no desire to become a precious metals or Brazilian Fund, but if you do not already have a little exposure to these two areas, give them some consideration.

Closed-end bond funds that use leverage are well represented on the list. The double-edged sword of leverage has slammed them as interest rates are up a little in recent weeks. Retail owners have dumped the shares. Muni funds seem to have the largest presence on the low list and seem attractive at first glance. They trade below net asset value and sport what looks like very attractive tax-free yields. The caveat here is that you had better have a strong belief that long-term rates are going to reverse course and move lower before jumping into these. I do not believe this, and I am on the sidelines as they may be cheap but I don't feel like there is a margin of safety in these issues.

The same holds true for mortgage real estate investment trusts. American Capital Agency (AGNC), Annaly Capital (NLY) and Armour Residential REIT (ARR) have been getting crushed for months. Book values are falling as the price of existing mortgage bonds drop and the m-REITs use enormous amounts of leverage -- and they are on the wrong end of the sword. If we get stability in longer rates, we could see a brighter picture of these REITs. The higher long-term rates could raise interest margins and the Fed is still buying $85 billion a month of securities, which could put a floor under mortgage prices. As usual, I have ridden my m-REIT holdings lower with the market. I am intrigued by the idea of adding to them but we need a clearer picture on interest rates markets before doing so.

The list of new lows also has many economic-indicator stocks. Shares of resources companies like Cliffs Natural Resources (CLF) just keep heading lower. So do select shipping names, such as Diana Containerships (DCIX) and Nordic American Tanker (NAT). The combination of stocks falling on concerns of a weak global economy while others are losing value because of rising rates seems to be a disconnect. I have a small presence on both sides but I am hesitant to add until we see what happens with interest rates. Either global economic activity improves, lifting the miners, resource companies and shippers, or the global central banks will have to take steps to attempt to reel in the long end of the bond market.

Tomorrow I will look at specific stocks hitting new lows that look like attractive long-term bargains.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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