We think it’s Europe, but in the meantime we need to keep our guard up
We won’t know for a while who is going bust, but our best guess at this point is a major European bank (or two). We are faced with the highly uncomfortable prospect of waiting for the world’s central banks to do something to back-stop the system.
This is not an environment conducive to the type of analysis we specialize in—figuring out which companies have an advantage in the marketplace. We are left with the need to protect client assets in the short-term, while keeping our eyes peeled for opportunities when the inevitable recovery in stock prices arrives.
We have raised cash in the last week and it has softened the blow some. Also, yesterday we actually had some stocks that were up on the day. So we may have passed the point when everything is sold indiscriminately and moved into a healthier phase when investors are once again making distinctions between individual companies.
If we knew that was the case we would be using the cash we have, but one day hardly makes a trend and given our belief that a major bankruptcy is in the making, we need to be defensive in our approach until the central banks act.
So far the losses in our portfolios have not been crippling. For the year we are down less than half the decline registered by the major indexes. (Those indexes are down just over 10% since December)
Cutting back on stocks when company fundamentals are so good is painful and we stand the chance of hurting our relative performance by doing so. However, we can’t ignore the risks we face in areas where we have no control or expertise—namely European sovereign debt and the bond portfolios of European banks. And, oh yes, there are still our own issues centered in Washington.
This too shall pass, but in the meantime we will be playing more defense than offence.
Daniel A. Ogden