Last night at Chez Melvin, we focused on the search for maximum pessimism. The U.S. stock market has not exhibited this condition for some time now. It existed last year in Europe, but even most of those markets have bounced off the bottom. The Italian and Spanish markets that were in severe bear market conditions this time last year have recovered nicely and are in the black for the past year. Even the Greek markets have gone up over the past 52 weeks. Maximum pessimism is just not apparent among the global equity markets.
So, this must mean sell, right? Hardly, as I am not exactly finding maximum optimism either. Stocks are climbing the wall of worry after scaling the fiscal cliff to start the New Year. For every bull there is a bear, it seems, and a great deal of confusion among the so-called experts. Now is the time to sit back and enjoy the gains in the stocks you bought when everyone else was puking under the desk and scrambling to meet margin calls.
Our European bank positions are a great example of this. They are not panic level cheap anymore, but they still sell at a discount to book value. This is the time to hold on until optimism and valuations reach a fever pitch. I am not a buyer right now, but I suspect it will be a long time before I even consider selling.
Some market sectors are seeing depressed level pricing. Among the worst are education stocks. As long as someone, somewhere, has a glimmer of hope for these stocks, then the sector is not at maximum pessimism. This industry has a buggy-whip feel to me. The business model is broken. It is too early to search for the few survivors in the group, and I suspect most of them will trade below net cash before it's all over.
The solar sector has also seen stock prices crash in a pretty dramatic fashion. I believe it is too early for solar to thrive as an industry. It will someday, but the technology must improve -- especially in the battery and storage part of the equation. Over the past three years, solar stock sector indices have fallen by about 40%, and I see no reason for them to recover sharply. I could be wrong, but until the industry can stand alone with tax breaks and subsidies, I do not think solar is a suitable area for most investors. A lot of money jumped into the sector when one of Warren Buffett's companies invested in solar projects, but those deals have huge tax breaks and subsidies attached to make them viable. I fully expect solar to provide a major percentage of our energy needs, but I think they will be in my children's homes, not mine.
Coal stocks are near a point of maximum pessimism. Competition from cheap natural gas and outright hostility form regulators have pushed coal demand lower over the past few years. Coal stocks were down about 25% last year and have declined for the past five years. I am long coal coming into this year, as I own shares of Arch Coal (ACI) at 60% of tangible book value. I am also hoping that we see additional selling so I can buy Peabody Energy (BTU) below book. Like it or not coal is part of our energy solution for decades to com. In addition, emerging markets, such as China and India, could care less what the EPA and other agencies think of coal. They just want cheap power.
When I scan commodity markets for maximum pessimism ideas I see one that just leaps out at me. Coffee prices have been terrible for not just one but the past two year. There is some excess supply in coffee but when viewed historically I am told inventories are actually on the low side of things. While commercial traders remain net long coffee, speculators are short at levels not seen since 2007. All the analysts are touting the strong Brazilian and Columbian crops and expect prices to stay week. This is my kind of maximum pessimism. Everyone seems to think markets are going in one direction and speculators are massively short. There is a coffee ETF, iPath DJ-UBS Coffee Total Return Sub-Index ETN (JO), and, although I am not really an ETF guy, I think I am going to take a little long position in this thing. Please focus on the word little. I am not by nature a commodities speculator, but coffee is closing in on multi-year lows and strikes me as being extraordinarily cheap. Still, I am just going to take a very small "hero or zero" position and treat it like an undated option.
There is not a lot of severe pessimism in market prices right now. Neither is there much excessive optimism priced in. It's a good time to do nothing until prices improve in either direction. Sit back and have a cup of coffee.