There's far too much angst and consternation among investors. Worry is a waste of energy, and it can influence the decision-making process. The average investor worries far too much about the market as a whole and not enough about locating undervalued companies that can perform in a weak market.
I might not have bought my
Top-10 Turnaround Candidates (posted in December) if I had known that the
was going to drop 10% and the
would decline more than 20%. But I disregarded the market, as I always do, and the Top-10 list has been profitable, up 27% since December.
I don't worry about the market -- and neither should you. Here's a handful of reasons why now is a particularly poor time to worry.
- Too Late to Worry: It's too late in this cycle to worry now. Consider worrying after a couple of up years, not after a couple of bad years. The market was down last year. It's down again this year. Absent a depression or world war, the market does not go down three years in a row. Get ready for better times.
Inflation: For financial assets, this is the lethal scourge to worry about. But there is no evidence that inflation is anywhere in sight. Capacity is more than ample, demand is falling, and employee wage leverage has quickly dissipated. The foundation is not in place for a ramp in inflation.
Easy Comps: Virtually all of the companies that I follow are facing easy comparisons starting in the third quarter, with comps becoming incredibly tame after that. Easy comps never fail to provide a benign backdrop for equities.
The Yield Curve: Inverted yield curves (short-term rates higher than long-term rates) are always a harbinger of a slower economy. We had an inverted yield curve last year, and it proved prescient again. But the inversion is now long gone and has been replaced by a steep yield curve. Steep yield curves almost always presage stronger economic growth.
An Aggressive Fed: Everyone knows the
Federal Reserve has lowered rates several times. After a slow start, the Fed is sounding more aggressive as recent comments suggest it's singularly fixated on spurring the economy. I don't want to take the other side of this bet.
Peaking Dollar: I follow a number of companies at which results are unusually depressed by a strong dollar.
Office Depot (ODP) - Get Report, for example, has a vigorous growth engine in its international business, but it has been completely masked by the strength in the dollar. We are long overdue for a cyclical recovery in international currencies, making earnings gains easier to generate.
Our Tech/Telco Depression: We have had rolling depressions hit a number of sectors in the past 20 years, from oil to real estate to savings-and-loans, to name a few, and the economy has survived each one. The tech/telco depression will be no different. It will come to an end soon enough, and we will see new leadership emerge despite a phalanx of naysayers and doubters.
Excess Valuation: I remember seeing excess valuations at the bottom of the 1987, 1990 and 1994 bear markets. Don't wait for downside action in the market to correct all excesses before you turn bullish. We will always have excesses in the market, even at the bottom of a bear cycle.
Trading on 2002 Earnings: Don't worry about the second-half recovery in the economy that many have been hoping for. It's not a prerequisite to better times for equities. As we get into the second half of this year, equities will begin to trade on 2002 earnings prospects.
I'll soon be posting a six-month update on my Top-10 Turnaround column. I'll review each stock on the list, with an updated opinion on each. The Top 10 beat the S&P 500 by 22% in their first three months, and the spread has been getting wider. Those stocks now are ahead of the S&P by 36% and the Nasdaq by 56%. Get the update first, exclusively, on
Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment adviser specializing in turnaround situations. At time of publication, Alsin and/or ACM was long Office Depot, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to