Hi everybody:
Sorry to have abandoned the Forum, but the last week's events dictated full attention to my clients and portfolio. Just to recap my two cents...as we have discussed previously, the U.S. market really was in fairy land from a valuation standpoint. The Bulls had ignored Asia, valuation, earnings disappointments and profound economic and geopolitical risk. It therefore seems ironic that the most economically irrelevant issue (i.e. Russia's crisis) would be the event that tipped over the apple cart. Setting aside the nuclear implications--consequences from which we can neither analyze or predict--Russia's problems are far less relevant to the world economy than Japan's travails.
Russia DOES illustrate the second order impacts deriving from Asia. Specifically, the Asian crisis has reduced the worldwide demand for oil, prompting a collapse in commodity prices which has damaged/disrupted the economies of many oil producing nations, but has proven particularly lethal to tottering empires such as Russia. Parenthetically, falling oil prices should help importers like Japan. So what does one do?
In my judgment, the WORST thing to do is to listen to the news, stare at your quote machine and sit around contemplating the end of the world. Nobody seemed paralyzed by fear when our markets jumped 30% a year for the last several years...but a sharp correction has sent many so-called investors out to build bomb-shelters. Trust me on this point...PANICS HAPPEN...there is a long sordid history of stock market corrections...and only one, out of well over a dozen, had any long-term consequence.
Since pricing is on the margin, and driven by supply, demand and human emotion, stock prices can go ANYWHERE in the short-run. Qualcomm can trade at $67 or $35...it's really of function of liquidity (or a lack thereof). But...if you understand what you own, what it is worth, why you own it...and you recognize that U.S. interest rates will NOT rise anytime soon...then it is a pretty damn good bet that strong companies, with rapidly growing earnings, will recover dramatically once the smoke clears.
Unlike 1987, the Federal Reserve has not yet flooded the system with liquidity. In my mind this is because (a) the U.S. economy remains quite robust and (b) our dear Fed Chairman believes that it is correct and appropriate that some of the "irrational exuberance" be taken from our markets to prevent a Nikkei-type bubble. Remember, however, that the U.S. and Europe are the economic locomotives that are needed to pull the rest of the developing world out of recession. Within this context, Greenspan CANNOT risk allowing our economy to deflate...so he WILL act if this decline continues...particularly as it spills into consumer confidence and consumer spending. Said another way, this crisis to shall pass on the back of a soon-to-be accommodative Fed.
Don't panic guys. The easiest thing to do right now is to sit around, bitch and moan, proclaim the end is here and panic over falling prices. Don't do it. That is what the herd is doing right now. That is what is easy and thoughtless. My advice? On a blank sheet of paper, write down all the relevant valuation parameters (debt & cash adjusted market value, price-to-income, price-to-book, price-to-sales, debt-to-equity, ROE etc). Think about whether or not the underlying stock is really a bargain. Then reasonably handicap the earnings outlook and risks associated with it. If when you are done with this exercise, the stock looks like an extraordinary bargain, then stop worrying about where its price goes today or tomorrow. Trust your thought process; trust the numbers and the facts...don't fall prey to fear, emotion and panic.
By my (conservative) estimation, Qualcomm is now trading at 1.0x Fiscal 1999 revenue, 14x FY99 earnings and 2.3x FY99 book value. That, my friends, is really all I need to know.
Best regards,
Gregg |
