This is my first column in The Journal and I thought it would be appropriate to share with the readers my state of mind vis-à-vis the global stock market. I have been in this business for more than 20 years and I have never seen so much “end of the world” talk. I recommend you take the time to look at the situation without being distracted by the daily news; here is how I see the present economy and why I am an optimist.
I almost lost my dad last month. After a simple knee replacement surgery, he experienced some complications and his heart almost gave up, twice. He is doing better now. This was a difficult time for me; however, I remained optimistic. You see my dad is a fighter, a pig headed man who never gives up without a fight. In fact, he still races kayaks at 74 years of age and he wins his fair share of competitions. Not that he is particularly skilled, but he likes to compete and loves to win. After achieving great success in the garment business in the seventies, my father lost everything in the eighties. He moved from job to job for years then out of the blue, he started carving birds. Without any prior training, equipped with a few knives and some wood, he spent his days sculpting. Three years after, he ended up at the world championship and won the first prize in two categories. He is now recognised worldwide; from being the king of garment to a world champion carver, all because he wants to be the best.
I spoke to my dad after his operation and one of his first questions was: “Son can you explain to me why stocks are getting slaughtered when corporations are making more money than ever? Should we sell? What is going on?” One would imagine that after a near death experience, my dad would consider focusing on a more spiritual discussion. However, for my father you are either dead or alive. If you’re alive and kicking, you go back to the basics, ask questions and try to understand what is taking place in the world. Coming back to his question, I found myself starting to mumble, trying to explain that we moved from a world having too many individuals with too much debt. As those people defaulted on their debts, it created stress in the financial system. The government had to intervene and salvage many banks by injecting capital. Those same governments, by doing so, became overburdened by debts themselves. The problem unfortunately of moving debts from individuals to banks and then to governments is that it comes full circle. The payment of the debt moves back to the population through the introduction of higher taxes and spending cuts.
My dad’s said: “I understand that but answer my question, why are stocks going down?” At that point, I wished they had increased his medication a little. “Well you see”, I answered, “as governments reach their breaking points they will have to increase taxes and cut services, reducing their positive financial impact on the economy and reducing the amount of money people have to spend. If you remember we went through the same thing in Canada during the ’80s. The country had its credit rating downgraded, struggled with unemployment as high as 12 per cent for years and saw many essential services such as education and healthcare being reduced”. I knew at this point he would remember what took place as he lost his business during that period. My dad didn’t say a word for a few seconds, then he said: “Wasn’t the clean up in Canada a good thing? Isn’t Canada one of the strongest economies in the world now because of that discipline? Shouldn’t we be happy that the rest of the world is catching up? What is happening is not bad, it is good!” “You are right,” I said, “however today the people that are selling their stocks are short sighted. Their vision is tainted by negativism, they see Europe crumbling under the weight of their debts, they expect US consumers to stop spending and they fear a depression.” I do not agree with them, and this is why we need to seize the day and increase our equity allocation.
There are many reasons why the stock market volatility keeps me awake at night, but when I stop and rationalise the situation, I conclude that everything will be all right. Here are a few reasons to be optimistic:
Corporations since the financial crisis of 2008 have more cash than ever on their balance sheets and are better prepared to face any downturn in the economy. They are increasing their dividend payments and share repurchase. With rates at historically low levels and the Federal Reserve clearly stating that they will not increase anytime soon, the opportunity to invest in stocks with high dividend payments is becoming increasingly appealing.
Despite the fact that housing starts are down in most major US cities, the sale of existing homes continues to climb at a rapid pace. This will help remove the surplus of inventory of unsold real estate. In other words, if you were planning to wait before buying that condominium in Florida, you better start shopping now. With rentals rising as much as 30 per cent in many cities in the US, it is just a question of time before the value of houses improves.
For everyone that dies today, two more people are born to take their place, so if you think the future demand for food, oil and other commodities will be reduced going forward, think again.
Governments around the world are aware of their horrible balance sheets. They are not addressing it yet, but the pressure from their populations and lenders is there and will force them to tackle the problem.
The reality is that stocks are cheap. When you analyse their P/E ratios, they are currently trading around March 2009 levels. We need to remember that in April 2009 the market took off and produced in excess of 70 per cent return for the following twelve months. The market is forecasting a major drop in earnings for the quarters ahead. There is a greater chance of a positive surprise to the upside rather than a negative one to the downside at this stage.
There is too much doom and gloom at present time. Be contrarian, buy when people are fearful and sell when they are exuberant.
This market is like my father; do not underestimate its ability to fight and its desire to win. Buy stocks today and be patient, they may go lower, but long term stocks represents great value in your portfolios at this entry point.
Eric St-Cyr is the founder and CEO of Clover Asset Management, a wealth management firm located in the Cayman Islands and servicing clients across the Caribbean. Eric has maintained a financial column in many Caribbean papers and is a regular collaborator of marketwatch.com, a division of the Wall Street Journal.