Is Another Correction Coming, Or Is The Worst Over?

 |  Includes: INTC, MSFT, WRLS
by: David Klein

In July we penned an article titled "Market Correction on the Horizon? Use Caution Going Forward." The major fear at the time was whether the US would raise the debt ceiling or risk, however remote, a possible default. The concerns in Europe were the situation in Greece -- i.e., would Greece default? The underlying and more damaging fear was how a default would affect Portugal, Ireland, Italy, Spain or -- worse -- some unintended consequences yet unknown.

Fast-forward to the present: The US raised the debt ceiling, avoiding a deeper market sell-off, but unemployment remains persistently high with zero job growth in August. The jobs plan announced by President Obama did little to lift confidence concerning the economy. The US debt remains a drag on the economy with hopes that the "super committee" will pull a rabbit out of the hat. The Federal Housing Administration is suing banks, seeking billions of dollars and claiming they overlooked evidence of fraud at a time when banks are reorganizing, adjusting to increased regulation, or downsizing. The NLRB has sued Boeing for opening a $750 million plant in South Carolina, basically demanding additional jobs go to the state of Washington. The bottom line is there is still plenty of economic uncertainty for US consumers and businesses alike.

The cost of insuring European sovereign and bank debt rose to record heights as a default by Greece moves closer to reality amid a worsening European debt crisis. The contagion has spread to Italy, where Prime Minister Silvio Berlusconi is trying to pass a 54 billion euro austerity bill and reassure European leaders of Italy's commitment to cut its 1.9 trillion euro debt. The resignation of European Central Bank official Juergen Stark is rumored to be due to his stance against the ECB’s policy of buying bonds of troubled eurozone countries such as Spain and Italy. Moody’s is expected to downgrade France's largest private-sector banks, reflecting a debt crisis that has spread beyond the borders of Greece. Economic uncertainty seems to be the theme of the day.

US markets are down roughly 14% since the above-referenced article was published in July. Fears the negativity in Europe will continue have an ongoing impact in the US markets. The million-dollar question is, Are we close to a bottom? Even with a 14% decline we have yet to see any panic selling. A simple definition being, as fear spreads, many investors will abandon their plans, showing a complete disregard for any long-term investing plan based on fundamentals. An example, although very brief, was the Flash Crash in 2010. We’ve yet to hit the point where fear becomes so pervasive that any market drop defies logic. Hopefully we won’t get there, but the chances are increasing as the global economy continues to deteriorate.

The grim situation outlined above could yield market opportunities after allowing time for the sell-off to run its course. Instead of trying to pick a bottom, focus on finding undervalued companies with a history of solid cash flows and earnings that will probably weather the storm better than companies with little or no track record, or those with high debt-to-equity ratios. I have no idea what will happen, but longer-term opportunities sometimes present themselves amidst an atmosphere of investor apprehension. There is no rush to jump in and buy, but a longer-term buying strategy may be better suited to an environment where predicting a recovery is akin to picking a bottom.

Below is a sampling of dividend-yielding tech companies we’ve written about on Seeking Alpha whose fundamentals may not change if the markets react negatively to the European and/or US debt problems. Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) are large cap stocks with good track records of generating strong cash flows and earnings and low debt-to-equity ratios. Telular (NASDAQ:WRLS) is a small cap stock whose history of generating cash and earnings is more recent, since new management was installed around 2008. We prefer dividend-paying companies, especially in times of economic uncertainty. Those with no dividend preference may want to keep an eye on Apple (NASDAQ:AAPL).


Updated Fair Value

Date First Published

Publish Closing Price

Recent Price

Dividend Yields

Instablog Link

Article Link

























Click to enlarge


I remain cautious until visibility is clearer, however I’ve started to slowly nibble at stocks with money that can be invested for the longer term, since any recovery is unlikely to occur overnight, and the chance of a market capitulation based on panic selling remains a possibility until the European crisis plays out.

On the plus side, any market effects linked to the European crisis may be short-lived in US markets. The bottom line there is no need to rush into parting with your excess cash. Pick stocks with strong fundamentals, and stay the course if the fundamentals stay intact. Any catalyst sparking panic selling could give the markets another double-digit-percent haircut, which is why proceeding slowly is a wise strategy. Is there a correction coming? I don’t know -- but it’s hard to imagine any meaningful improvement if Europe continues to worsen and US political gridlock continues through the 2012 election.

Talking about buying during a correction is easier said than done. Stay in control of your emotions, and base your trades (buy or sell) on sound investment decisions, not panic or fear. Post your market sentiment in the comment section.

Disclosure: I am long WRLS, INTC, MSFT.