Calamity or Correction?

Lance Spicer, Editor - Trident Confidential, 10 Jun 2011, 8:36 AM

Just watching events over the last week has made me realise that the stock market has a way of completely sending people batty with the volatility. However, in my opinion the market seems to be an exact replay of last year – almost like the Bill Murray movie, Groundhog Day. I feel I could be living 2010 all over again.

Let me explain. Let’s look at the two years.

The Situation in 2010

• The market was nervous about QE1 ending and what effect it would have on the bond and stock markets
• Greece was a real worry with concerns they may default.
• The US recovery was weak and there were concerns that it could double dip into recession.
• There were concerns about US debt.
• US corporate profits were recovering strongly
• The Trident Confidential Portfolio was up only 13.6% after the first 5 months of the year

The Situation Now in 2011

• The market is nervous about QE2 ending and what effect it will have on the bond and stock markets
• Greece is a real worry with concerns they will default.
• The US recovery is weak and there are concerns that it could double dip into recession.
• There are concerns about US debt
• US corporate profits at record levels
• The Trident Confidential Portfolio is up only 19.6% after the first 5 months of the year.

You see what I mean? It’s an identical replay! They often say history rarely repeats itself verbatim, but it rhymes – Well, this is ridiculous - it looks a lot like verbatim to me.

This year the market peaked in April, just like last year, and since then we have been heading down and I suspect we may be in for a couple of months of volatility, as Greece is sorted out, US Debt concerns are dealt with and the US economy starts showing renewed signs of life.

Unfortunately, I expect this year to be more like last year than many others expect. I expect the markets have a little further to fall in June and then they’ll bump along the bottom for a couple of months and then finish the year strongly, as they did last year.

There’s little doubt one of the factors that’s upset the apple cart this year, that didn’t occur last year, was the devastating and tragic earthquake and tsunami in Japan. This is has caused major disruptions for the car industry as well as for technology. This has many economists believing the latest slowdown in the US economy has been caused by this disruption and things will return to normal as alternative sources of supply are found and Japan’s re-building begins, which will turn out to be a positive for global growth.

As you well know, after the mid year disruption in 2010, the markets recovered strongly in the second half, in much the same way we are hearing this year. Most economist agree that the latter part of 2011 will see growth return and with it confidence.

Last year, I saw the correction as a buying opportunity and told subscribers to buy quality stocks while they were at bargain prices and this resulted in turning the 13.6% return earned in the first five months into a 78% return for 2010. This is entirely due to buying when others are selling – going against the “crowd”.

I suspect this year will be the same - very much the same. You see, I don’t believe for a moment the US will double dip into recession (I didn’t last year either), nor will Greece default and the market will recover, regardless of whether QE3 is implemented. All the things worrying the market, while exactly the same as last year, are nowhere near as acute as they were last year. It’s just that investors are still very jumpy, which is understandable, and that provides opportunity.

This week I have advised my subscribers to buy 5 stocks before today’s bounce and they’ll no doubt be happy they did. Was this a risky and reckless move? No - not all - not if you look at the facts and analyse what the realistic worst case scenarios may be. Quite often if you remove the irrational fear and the media hype from your analysis, you often come to the conclusion that all the current problems will be worked out in time, and that’s all you need to know.

Investing is not a short-term thing, you have to allow time for things to work out. Many people thought the Global Financial Crisis was the end of the world – I never did. I knew the problems would be worked out and buying stocks in early 2009 was the most sensible and logical thing to do. That turned out to be correct.

Find out what the 5 stocks are now

Confidence to Invest Now

One of the things I look for when analysing the market condition is what is called a margin of safety. It’s basically where a stock has been sold off to such a point that it becomes so cheap that it’s very unlikely to go too much further. Sometimes, it can be ratios like the PE ratio or Return on Equity that will alert you to the fact that this company has never been cheaper by valuation. On other stocks it will be a glaring “market mistake” like Net Asset Value compared to Market Price.

In times like these you can find stocks that have been sold off so much that their price no longer makes any sense at all. One such Australian company is trading at more than 25% discount to it’s realisable current assets. What this means is you can buy a dollar for $0.75! Now these assets I’m talking about are assets convertible to cash in a day or in fact cash itself. This is ridiculous, but the market at times like these becomes irrational – It’s currently completely nuts!

I have recommended my subscribers buy this stock this week and hold on to it until the market comes to it’s senses. However, there’s another good thing in this deal and it’s the fact that these assets that the company holds have also been driven down in value during the recent market correction, so when the market turns, not only will the discount to Net Asset Value disappear, but the underlying assets will also appreciate. At such a discount to rational valuation this company has a huge “margin of safety” around it.

Buying stocks when markets are in fearful mode is not for everybody, however, it is the time when the biggest profits are made. You only have to check in with Warren Buffett who made his massive fortune buying stocks at times like these.

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