Need Some More Pessimism

 | Jul 03, 2012 | 9:57 AM EDT  | Comments
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Stock quotes in this article:

alu

,

EWZ

Many of my recent studies and research efforts have driven home one very important point for investors. Sir John Templeton was never more correct than when he said to buy at the point of maximum pessimism. Back in late 2008 and 2009 no one wanted to buy stocks of any kind. Fundamentally sound, cheap stocks bought in that time period have soared even further than the recovering stock market.

In 2000 to 2004 no one wanted to buy anything tech related. Tech stock bought below cash and tech-related debt securities have soared by hundreds of times the original purchase price for brave investors. Millions of bytes of computing power and some brilliant people spend hours every day studying each tick of the market looking for an edge and I am not sure they outperform those steely-eyed souls who truly buy when there is blood in the streets.

We are far from the point of maximum pessimism here in the United States. When I run my screens for safe and cheap stocks we are turning up very little outside of the energy sector. We picked up some natural gas names earlier this year when there was heavy bleeding in that market. I suspect energy gets cheaper as the economy continues in a better, but not good mode. But that prediction, like all others, won't get you a cup of coffee. If the stocks get cheaper I will buy them. If they do not I will not.

I have not been quantifying my observations but it seems to me that most of the people on my Twitter feed and Facebook page are bullish on stocks. The common consensus seems to be that the fiscal cliff next year is a problem, but for now stock should rally right up until the economy collapses. I think that's kind of cute that folks seem to think the market will just ignore the world and follow a profitable consensus pattern. There are far too many potential surprises of both varieties that could occur and shatter that pretty scenario. I won't try to make a prediction, but the market is not at a point of pessimism, so I will hold what I own and cherish cash, spending it only when I find a truly safe and cheap situation.

Outside the United States the situation begins to get somewhat more interesting. The Spanish and Italian markets have fallen over the past year to the point that the vultures are circling. The French markets are down about 20% in the past year and have a double-digit annualized loss over the past three years. I am spending some time digging around the continent looking for non-financial companies that will lead a broad European recovery in the future and are safe and cheap at the current price. I am looking at the European telephone and electric utilities as well as tech giants like Alcatel Lucent (ALU) that could offer the type of spectacular 10-year returns one expects from investing in beaten markets.

Latin American markets are also starting to capture my attention. The Brazilian ETF (EWZ) is currently down almost 30% over the past year. Brazil had been a global growth leader, but has seen some slowing and even inflation drag down stock prices. The behavior of Brazilian investors has also had an effect on stock prices. A Brazilian investor told me recently that his countrymen are addicted to high yields and liquidity. They will normally eschew the equity markets. Brazil has had some of the highest interest rates in the world for some time now, so double-digit returns in liquid accounts were not uncommon. That is changing as the Brazilian Government is lowering interest rates to reignite growth in advance of the 2014 Olympic Games. If local investors begin to move into equities this could catch the attention of larger international capital pools and push the market higher over the next few years.

Jim Cramer is fond of saying there is always a bull market somewhere. Fortunately for us, as long-term value and vulture investors, the opposite is also true. There is usually a deeply depressed market selling at bargain prices somewhere as well.

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