This weekend, I made time to talk with the usual cadre of investors and traders form around the country. It is at best a confusing time in the markets and I think we all find it helpful to talk with those who approach markets differently than we do. Knowing what the short-term guys and gals are doing is helpful in planning and preparing a day-to-day strategy. Having an awareness of what the commodity folks think is going on in their markets is very useful . In addition, the fixed-income traders have valuable insights that are often reflected in the stock market in a very short period of time, so it is always valuable to speak with them.
When asked what I thought of the world and markets this weekend, my reply was that I see some incredible long-term bargains in certain sectors but the risks are higher and more varied than I ever recall in my career. Certain European and Japanese financial institutions trade at end of the world valuations. Regionals and community banks here in the U.S. are very close to those levels. Pockets of the commercial real estate market such as hotels and shopping centers are too cheap not to own . I have established what I call a starter position in many of these names. You have to be a scale buyer now, as the risks of further substantial downside are just too large to ignore.
The risks should be pretty well known by now. The disaster that is Greece is spreading across Europe. In spite of furious European Central Bank (ECB) and Asian buying, yields on Italian and Spanish debt are creeping higher. The government payroll cuts and other austerity measures are not being easily accepted by a Greek population that has been the beneficiary of reckless spending over several decades. As seen by this weekend's election results, the German populace is increasingly unwilling to pony up to pay for their neighbor's debts and indulgent lifestyles. There is no easy fix in sight and the proposed solutions so far have amounted to less than a Band-Aid on the problem.
Here in the U.S., we have are own set of problems: spiraling debt, a weak economy, high unemployment and a stubbornly weak real estate market. The proposed solutions have been great for Wall Street but not so great for Main Street. The political situation would be laughable if I could stop crying. Leadership seems to be more concerned about party lines than problem solving.
Most market participants now think the Fed will engage in "operation twist" and buy up long-term Treasuries in another ill-fated move to nudge the economy along. It probably won't work, but it will be a huge boon for many Wall Street firms. In anticipation of the latest bad Fed policy, the 20 primary dealer firms have stockpiled $15 billion of long-term Treasuries to sell back to the Fed at higher prices. However, this will squeeze margins at small banks and more than likely hurt rather than help local economies outside the rivers and beltways.
It is just not a time for long-term investors to get overly aggressive. I keep reading about people going "all in" on the market, or adding leverage in anticipation of a bottom. I think calling for a bottom in the overall market right now is a huge mistake. I looked around carefully over the weekend to make sure none of my value friends could see me and checked some of the charts and indicators I have found useful over the years. I see nothing that would indicate that the market is at a buyable bottom. There are some cheap stocks around and you should own some of them, but keep some cash on hand right now. "All in" can lead to "tapped out" if you are too soon and that is counter to the long term investor's primary mission of survival.
The bargains are few and the risks are high. Act accordingly.