Time To Buy?

Many investors are wondering if we have found a market bottom.  With Warren Buffett out buying stocks, shouldn’t all investors be doing the same?  The risk of entering the stock market at this point has declined.  However, the major bias is still down.  During the last week we did have some constructive activity and if we see more in the near future it would help to signal an even lower risk entry point.  We plan to deploy some capital in a newly created “opportunity fund” by one of our investment partners designed to take advantage of idiosyncratic opportunities the credit crisis has created.  We have also identified two high yielding dividend investments, one of which is tied to the energy industry.  With the decline in the price of oil, it may be a much better time to enter that market.  The best thing an investor can be doing at this point is to scan the horizon for attractive opportunities, build watch list, and under some circumstances carefully deploy capital.  We do not expect to reinvest our capital at the bottom, but we would prefer to do it after the bottom has passed versus watch our investments decline in value.  That being said, we are willing to take some risks at this point, but are not yet ready to fully commit our cash.

There are several other reasons for caution.  U.S. indexes have not witnessed a new group of strong individual stocks to lead the market.  A few candidates have emerged, but the quality of any rally improves dramatically when strong stock leadership accompanies it.  Stock markets internationally have also delivered little bullish conviction.  While some markets are seeing price improvements, most remain muted and lack volume.

One way to take advantage of a depressed stock price is to use this opportunity for gifting.  At current prices you are most likely able to gift a much larger number of shares, within the same dollar limitations, then you were a year ago.  If transfer of wealth is on your radar, from concentrated stock or a large portfolio, now is a great time to consider action.

Part of our investment process involves an analysis of the business cycle.  We are keenly aware the stock market usually improves ahead of evidence of an economic recovery.  Our trusted provider of leading economic indicators, an institution with three generations of expertise, continues to indicate more trouble ahead.  We prefer to see an improvement in the stock market coincide with a turn up in leading economic indicators for our investment strategy to become aggressive.  Still, we are willing to take some risk ahead of data alignment, especially in asset classes with a unique characteristic.

On the economics front, the Cleveland Fed lowered the U.S. inflation rate to 4.94% from 5.37%.  Our inflation outlook remains muted and asset prices sensitive to high future inflation have not signaled a reason for change.  The government borrowing tied to the recovery program may be causing an unintended negative side effect, that of pushing some borrowing costs higher; the rate for 30 year mortgages jumped to 6.47%, up from 5.98% a week earlier.  Short-term money rates have come down but the negative Ted Spread remains very wide.  Housing starts are at 17-year low which could eventually reduce the supply glut of homes on the market, partially the result of an increase in foreclosures.