Be Greedy When Others Are Fearful

 | Oct 07, 2013 | 1:30 PM EDT  | Comments
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Stock quotes in this article:

aapl

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de

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wfc

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axp

The headlines have made it clear by now what could happen if the U.S. fails to raise its debt ceiling in the coming weeks: U.S. credit ratings could be slashed, the economy could fall back into a recession and the country's place in the world could take a step back.

They are the same consequences we heard about the last go around. Those are real and dire consequences if indeed the U.S. was restricted in paying its bills for any significant period of time.  

Mr. Market seems to be getting nervous. If he continues to do so and pushes markets down another 5%, I would channel in your inner Gordon Gecko and remember that "greed is good" -- at least with respect to the buying of stocks. Not a fan of Gecko? Then take Warren Buffett's tried and tested motto: be greedy when others are fearful.  

One has to believe that even if the U.S. were to "technically" lose its ability to take on more debt by October 24, that situation will not last long. Otherwise, we will have deep issues and the market will likely decline significantly for a prolonged period of time, circa 2008. But, dare I say that Congress understands the difference between failure to pass a budget and failure to raise the debt ceiling. 

In addition, sprouts of market confidence continue to pop up. Bruce Berkowitz, manager of the Fairholme Funds, announced that he plans to open his hedge fund to institutional money for the first time. Berkowitz wants the investment flexibility provided by a hedge fund in order to make bigger bets, to look at real estate or to make acquisitions when possible.

Despite saying that he was finding it harder to buy equities, Warren Buffett has also said he is still actively looking for opportunities as he believes equities are still a better investment than cash. In today's Wall Street Journal, many managers are saying they would be buyers of equities if the uncertainty over the debt ceiling creates a market selloff, and thus better buying opportunities.  

One perspective is that the continued uncertainty increases the likelihood that the Federal Reserve will maintain its low interest policy, a favorable stock market environment.

The general belief at the moment also is that any failure to raise the debt ceiling in a timely manner will be very short-lived, so any market selloff will be temporary. The irony is that while we may get a day or two of market declines, the actual selloff that many are looking for may never happen.

At the extreme opposite end, if the consensus is wrong and this debt celling issue takes weeks or months to resolve -- not an impossibility -- market confidence could erode quickly.  

It would seem that under even the worst scenario, putting capital to work in high quality, well-capitalized business would be a sensible alternative to cash. What if Apple (AAPL) fell low enough to yield a 3% yield? What if you could own Deere (DE) at less than 8xearnings? Or perhaps get another good bite at quality financial stocks like Wells Fargo (WFC) or American Express (AXP).  

One thing is certain: the coming days and weeks will not be boring in the financial markets.

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