Ever since Janet Yellen finally admitted last week that the global economy does matter, we’ve seen the deflationary-based selling spread to additional sectors, not just energy and metals as it was earlier this year. Anything sensitive to China and/or the global economy – like industrials, materials, transports, Emerging Markets, etc. – is being thrown out the window as it appears investors are trying to cut risk across the board. This is quickly turning into a liquidation event which means we’re likely to see further weakness moving forward. When you see even the “cheapest” stocks being sold off, it tells me that everything is being repriced to lower valuations. I think we’re in the early innings of people waking up to the issues but there are a few instances of “the baby being thrown out with the bath water” so I’ve made a couple new buys in stocks that have been crushed this year. I’m sure I’m early but sometimes you just have to buy when things represent good value and not worry about trying to catch the bottom.
Our two most recent purchases are both “income” stocks. Potash (POT), a Canadian-based producer of fertilizers, is down over 40% year to date (including over 20% in the last week) and Qualcomm, a chip maker for cell phones/smartphones, is off over 25% so far this year. I think both are quite cheap at this point and do not see the dividends at risk of being cut.
As for the macro environment, it’s slowly becoming evident that the game is up and the market’s perception of risk has flipped. Quantitative Easing (QE) was employed to inflate asset prices. No QE = falling asset values. Quite frankly, I see no way out of this without additional Quantitative Easing (despite it not actually helping the real economy) but the Fed can’t begin another round after a year of trumpeting how great everything is out there in the hopes of instilling confidence. We’ll have to see much more pain in the stock market before they turn on the spigots again. This is now a game of confidence and the severity of the selling will all depend on how much market participants believe the Fed can control/inflate things.
The positive side is that opportunities are being created. This might sound weird but I’m actually hoping the market falls further – a lot further. We have a lot of cash and put options to offset equity losses in the short-term. We’ll lose a lot less than the market actually falls, which is pretty much the most important rule of investing. And for all retirement (income) focused investors, falling prices mean yields are rising. The thing we care most about is that income/dividend payments are sustained, and I can assure you that’s the case with the companies we own.
Never a dull moment!
-Nick
Potash (POT) – 3 year (weekly chart) – 7.3% dividnend yield
Qualcomm (QCOM) – 3 year (weekly chart) – 3.6% dividnend yield
