Unless you’ve been stranded on a desert island since mid-July, you surely know that changes are afoot in the world of finance: stocks have fallen; companies have ceased to exist; and financial market participants are nervous. Substantial ink has already been shed in describing and analyzing the situation, and we can not add meaningfully to those discussions. Instead, we can give you our perspective on where we go from here.A more detailed discussion is available in the Research section of the Tower Private Advisors website. If you do not have access to the Internet, please give us a call. Finally, if, in the future, you would like to be kept abreast of developments in a more timely fashion, please provide us with your e-mail address.
The heightened volatility in virtually all securities that began in mid-July is a response to an extended period of complacency. Liquidity, which was the elixir of choice, has disappeared. One observer of the mayhem referred to liquidity as a coward: it flees at the first sign of trouble. In poking through the wreckage, watching it take place for that matter, the entire real estate market including, specifically subprime borrowers and their mortgages, has been brought to the fore.
Our current thinking
Any time markets fall sharply, opportunities arise from the wanton selling. Victims range from 1) companies closest to the epicenter and most closely related, to 2) those tangentially related, to 3) those remotely related, and to those 4) virtually unrelated.
We do not believe that problems in residential real estate and consumer mortgages are going to be sufficient to send the economy into recession. At the same time we are mindful of at least two things. First, this is presently the consensus opinion, and as Warren Buffet has said, “you pay a high price for a cheery consensus.” Second, a lot of jobs are tied to real estate, from realtors to construction workers to mortgage loan application processors. The labor market is an important support for the economy and for our position on investments. Consequently, we’ll watch for spillover effects from housing on employment…
We think the decline in shares represents a correction in a stock market that will continue to rise. Accordingly, we think there are opportunities in the latter three categories of companies listed above.
In our asset allocation product, mutual fund-based Global Portfolios, we are adding a 5% position in an emerging market stock fund. Emerging markets represent developing countries, second and third world, on their way to becoming developed countries. If the global economy remains strong, these countries will continue to benefit as they both develop and provide resources and goods to the rest of the world.
Indiscriminate selling of consumer-related shares, especially those furthest from the sub-prime category, such as high-end retailer Tiffany’s–has made them attractive. Similarly, knee-jerk selling of companies in the Basic Materials sector, mining concerns especially, has also left those shares attractively valued.
Investment Management Tower Private Advisors