“Negative Sentiment Based on Political Discord Presents Opportunity”

Sydney M. Williams

Thought of the Day

“Negative Sentiment Based on Political Discord Presents Opportunity”

February 16, 2010

“To him politics was like the weather. You could make occasional forecasts but you could not control it.” So writes John Marquand about Tony Burton, President of Stuyvesant Bank in Point of no Return. Despite the fact that the market is anticipatory, while politics tend to be reactionary, the two are inextricably intertwined. It is always important, therefore, to stay attuned to what is happening in Washington and around the world.

Greece, having been given a month reprieve by fellow Euro-zone countries, remains on the verge of bankruptcy. Germany and France worry, understandably, of the moral hazard of bailing out their prodigal southern neighbor. When a sailor returns penniless to his ship from shore leave he doesn’t expect his companions to ante up; he waits for the next pay day. The conundrum focuses attention on the weakness of a single currency among countries with different budgets and views toward deficits. It may well be that the answer will not be left to the Europeans and that the IMF will have to intercede.

At home, Congress remains a mess. In announcing his decision to not seek a third term, Evan Bayh said, while he loves most aspects of public life, he “does not love Congress” – an understandable attitude given the intractable nature of the two parties and the lack of civility among their leaders. Despite massive stimulus spending, government ownership of banks and auto companies, and record government spending and deficits which will require higher taxes, President Obama has declared himself a “fierce advocate” for the free market. In this regard, it is better to watch what he does than only listen to what he says.

These issues can be discussed endlessly. We all have opinions as to how best grow the economy and whether the impetus should come from government or the private sector (or some combination of the two.) And, while it is fun to debate these points, the arguments do little to make money. Agree or disagree, we must deal with political issues and decisions as they exist.

Earlier, in the same book, Point of no Return, Marquand describes his hero, Charlie Gray’s job: ”…but his profession was investment which in the purest sense was only an endeavor to cut the cloth according to the situations which radicals and liberal created.” This we must do.

When the noise surrounding us becomes muffled and we are able to look at our situation with calm, we see an economy in recovery, a government in debt, a consumer focused on his balance sheet and businesses generating cash and enhancing productivity at the cost of not re-hiring.

We have a market which is 6.5% below its January high, up 60% from its March lows, at 18X reported earnings, but, according to James Paulson of Wells Capital, selling at 13.5X current year estimates – a reasonable valuation, in my opinion. Total Federal debt, at $12.3 trillion represents about 90% of GDP, a peace time record. On the other hand, liquid-asset holdings by households and businesses stand at $10 trillion, also a record relative to GDP.

The profligacy of the State has been somewhat offset by the parsimony of corporations.

There is no such thing as clear sailing in financial markets, but, in my opinion (and being ignorant of a technical view of the market), current negative investor psychology has provided opportunity for the careful, selective investor.