Remaining Patient
Larsen Kusick
We viewed Monday's sharp advance as an indication that the worst-case scenario for the global economy had been averted. Although the potential for an overwhelming economic collapse remains low in our opinion, it's clear that the numerous concerns about the state of the financial sector, the outlook for corporate earnings, and the depth of the global recession are still a major hurdle for worried investors. Risk remains out of favor among institutional investors, and volatility (both actual and expected) remains at historic levels. In short, there's still no sign that investors should be putting cash to work without fear of additional declines.
After being hesitant about committing capital over the past two months, we were optimistic following Monday's rally, as we saw (and still see) numerous catalysts for stocks over the next three to six months. These include the enormous amount of cash on the sidelines, the deeply negative sentiment among investors, and the increasingly attractive valuations that have resulted from the past month's decline. Nevertheless, it's clear that the best policy for investors is to remain patient and pay attention to the relationship between earnings expectations and the weak financial results that we're expecting during the current earnings season.
Although expectations are low, growth-seeking investors need to get a better sense of what various end-markets will look like in 2009. Important areas for stocks in our model portfolio range from consumer spending, which affects the outlook for Dolby (DLB:NYSE), Guess? (GES:NYSE) and GameStop (GME:NYSE), to global infrastructure, which affects A-Power Energy Distribution Systems (APWR:Nasdaq) and Shaw Group (SGR:NYSE). The need for more information should keep investors patient, as it remains a horrific environment to be putting large sums of cash into the market without anticipating significant near-term volatility.
As such, we're staying patient and looking over earnings results from the many large-cap companies that report early in the season. We plan to provide additional commentary on the significance for investors in smaller companies with above-average growth potential.
We also plan on maintaining a focus on China and other international markets, as we anticipate major opportunities to present themselves as the global effects of the financial crisis play out in the coming months. At present, our China-related names include A-Power, Focus Media (FMCN:Nasdaq) and Perfect World (PWRD:Nasdaq). To conclude, there's a lot for investors to keep an eye on, and we're intent on positioning the model portfolio for significant gains as the current downturn in the global economy progresses.
