"Housing Market Continues to Spiral Downward"

"Subprime Mortgage Crisis Hurts Major Banks"

"Oil Trades At Over $100 per Barrel"

"More Economists are Predicting a Recession"

"Investors Sell Stocks Waiting for A Safer Market"

Even if you work at doing so, avoiding bad news is nearly impossible to do these days.  It seems the media's purpose is to scare us on a daily basis.  History is very clear, however, investing by the headlines is a loser's game.

Yes, the prevailing news today is disheartening.  But we must consider what really drives the markets:

Stocks are trading at multi-decade lows in valuation.
Compare the earnings yield on stocks to interest rates and you will discover the stock market is trading 50 percent under its fair value.  In sharp contrast, in early 2000 (when most investors felt safe in the market) stock prices were 50+ percent over valued.

Interest rates are now positioned to grow the economy.
Long-term interest rates are now above short term interest rates.  In addition, the Federal Reserve is desperately increasing the money supply.  In contrast at the market peek in 2000, long-term interest rates were above short-term rates, a sign that growth was slowing and trouble was ahead.

It seems everyone has given up on stocks.
Retail investors (usually wrong as a group) are incredibly pessimistic today.  Sentiment surveys and trading patterns provide evidence that individual investors have lost almost any remaining confidence in the stock market.  However, the institutional investors and corporate insiders we monitor (whom are usually correct as a group) are quite optimistic as they are aggressively buying stocks.

Today, most investors still feel the painful wounds they suffered during the 2000-2002 market melt-down.  Many are concluding from the daily news that both a recession and further declines in stock prices are a certain conclusion.  Internal self-talk is beginning to take over as many say to themselves, "I can't go through another 2000-2002, I should sit this one out and wait for safer times."

Consider this however:

• Stock prices advance 3/4 of the time and decline only 1/4 of the time.
• During recessions stock prices fall going in and bottom well before the economy shows any signs of a recovery.
• Going against the retail investment herd (at market peeks and bottoms) has shown to be a successful strategy, time and time again.
• The stock market is forward looking, while economic data reports what has already happened.  In four of the prior six recessions, after two consecutive months of job losses (as just reported this month) the stock market found a bottom and moved higher.

Given the tremendous support from valuation, interest rates and investor sentiment, we think now is an excellent buying opportunity.

I frequently remind myself of Mark Twain's reflective quote about worry and fear of the unknown:
 
"I have been through some terrible things in my life, some of which actually happened."

Thank you for your continued confidence and business.

Michael W. Bishop, CFA
President