In recent months, we've heard a refrain from some professional investors that it's "time to go to cash". The premise is that the Market has gone too far too fast amidst a still struggling economy and is now set for a major decline this week, or next week, or the week after (or maybe next month?).
One such prognosticator is Robert Prechter, who we mentioned back in August. He was back again in the media on 11/5/09 with a headline interview on Yahoo! Finance's TechTicker that "Stocks are 'Dangerous Place to Be'" - video link here. Mr. Prechter has more on his Web site about "How to Prepare Yourself for the 'Serious Event' Ahead". We understand that many traders follow Mr. Prechter's commentary closely, which could potentially lead to a self-fulfilling Market decline if sentiment becomes overwhelmingly bearish once again.
We don't disagree that the Market rally from the bottom has been incredible. Of course, the speed of the fear and liquidation driven decline last fall and into early 2009 was also incredible. We also don't disagree that economic fundamentals remain challenging with many things to worry about (unemployment, real estate, deficits, health care, energy, war - take your pick). Moreover, any sustainable, upward Market movement needs to be driven by improved underlying business fundamentals (i.e. growth). If the U.S. economy languishes and a Japan-style no-growth period ensues, stocks could also languish or decline as creative destruction continues to reshape industries. Finally, Mr. Prechter's "sell call" is likely on the money in one area: anything trading on thin air should be reduced or sold from portfolios, especially low quality businesses. Even more dangerous than an egregious valuations are weak balance sheets coupled with poor fundamentals = more reasons to sell.
However, as we've noted in our "How's the Economy Doing" series (update coming soon), we're cautious but don't think the sky is falling, particularly since we'll be bouncing up against easy Y/Y comparisons. Easy "comps" should lead to stability and even pockets of growth. Moreover, our buy/sell decisions for our businesses is based on our estimate of intrinsic value and not related to where the Market happens to be trading.
With respect to easy comps, the other week, many retailers released sales data for the month of October and, as reported and illustrated by the WSJ (link here), results were somewhat of a "mixed bag":
For the most part, discount/value oriented stores fared better than more discretionary retailers, although Nordstrom (NYSE:JWN) delivered a 6.5% Y/Y increase in same store sales. Overall, sales were higher relative to October 2008 (when bank crisis shock and awe was gripping the world):
- Sales at stores open at least a year, or same-store sales—a benchmark of the industry's health—rose 1.8% from October 2008, according to an index of 30 retailers compiled by Thomson Reuters.
- Retail Metrics Inc., a retail research firm that uses a slightly different methodology, reported an increase of 2.2% for its index of 31 retailers.
- Neither index includes Wal-Mart (NYSE:WMT), the world's largest retailer, which stopped reporting monthly sales earlier this year.
So, at least some persons are no longer hiding under a rock and returning to the mall and/or other local retailers. This, plus the fact that public and private equity, as well as debt deals are happening on Wall Street -- that is, companies are successfully raising capital -- are good signs. Further, our conversations with various C-level executives and other contacts indicate that many businesses are, in fact, stabilizing (although timing for a return to growth remains cloudy).
Accurately predicting short-term economic or Market performance is near impossible. Yet, our gut tells us that we simply won't return to the level of fear or economic paralysis that previously halted economic activity and led to the 2008-09 Market carnage (compounded by momentum shorting, in our view). Things remain difficult and the indices may well partially retrace upward moves, but indications are that we're in a different place today. From shock and awe, people move into realization, acceptance and new beginnings.
As before, we remain disciplined with respect to the types of businesses we own and their fair values. We're not going to cash.