After the Drop, It's Time to Stock-Shop


BusinessWeek's Gene Marcial says the latest round of panic selling presents steeled investors with a unique buying opportunity

Let's be realistic and get a grip. If I were an investor with ample resources, or a money manager who feels besieged by the market's latest tantrum, I would go shopping—for stocks. Not just any stock. I would buy the market's top losers on Thursday, Aug.9, when the Dow Jones industrial average plummeted 387 points, or 2.8%, to 13,270.65.

There are plenty to choose from: AT&T (T) fell 2.7% that day, to $39.25; Bank of America (BAC) dropped 2.7%, to $48.35; Chevron (CVX) was off 3.8%, to $81.11; Disney (DIS) fell 3.8%, to $33; ExxonMobil (XOM) plunged 4.5%, to $83.60; General Electric (GE) was off 3.8%, to $38.94; and JPMorgan Chase (JPM) tanked 5%, to $44.17. That's just a partial list. Other stalwarts were off significantly, too, including Johnson & Johnson (JNJ), Time Warner (TWX), Verizon (VZ), Cisco (CSCO), and IBM (IBM).

True, some people would say, the market may not be through crying its eyes out over the subprime mortgage crisis. That could happen, but so what? If prices do drop some more—I doubt very much that the Dow would tumble another 500 points—buy more of the same stocks. Or, if new loss leaders have come along, put them on your shopping list, too.

It Pays to Expect Extreme Behavior

Look at it this way: Do you honestly think that these companies will go out of business because of the mortgage-lending troubles? We have had market crashes galore in the last 35 years: the oil embargo of 1973; the double-digit interest rate scare in 1987; the Russian debt default in 1988; the dot-com bubble bursting in 2000; the horrific terrorist attacks on Sept. 11, 2001; and, finally, February, 2007, when the Chinese markets tumbled. In each of these events, panic gripped the markets. But look where the markets headed after such nightmares—up! In each of those incidents the market rectified itself. And now we have the subprime mortgage woes. If you buy these loss leaders now, you will see them in the big-winners list next year, if not sooner.

My point is the stock market should be seen for what it really is: a market of opportunity. If you take such a perspective, you will never panic, whatever is causing people to rush for the exits. That is the herd mentality at work. Be prepared for the market to exhibit extreme behavior. A market that is plunging is an opportunity to buy the stocks you know are solid. When the market is scoring record highs, as it did earlier this year, take profits to build up a reserve fund.

Positive Signs from Central Banks

To calm everybody's nerves, let's take a sober look at the turmoil that has roiled the credit and stock markets. Consider the flip side of this much feared tightening of credit worldwide. The Federal Reserve Board has injected $38 billion into the financial system to calm the waters, on top of the $24 billon it poured on Aug. 9. BNP Paribas (BNPP), France's largest publicly traded bank, suspended redemptions of its funds invested in U.S. mortgage-backed securities; Germany's Central Bank bailed out IKB Deutsche International (IKBG); and the European Central Bank in Frankfurt lent more than $130 billion overnight at a rate of 4% to avoid any jump in rates that banks charge one another for short-term loans. What do these moves mean? They are very positive moves on the part of the Fed and the other governments and entities to calm panicky investors and the markets.

It also means there are ample funds worldwide to take care of this particular problem. And instead of looking at it as "Oh, the world is falling apart, look at how the Fed is throwing money in—it must be in a panic!" consider these developments' quick rescue operations. The Fed could have done more earlier on. But it felt things were not bad and quite manageable. People should look at all these moves as positive because it means that if things do get worse, more help and funding are available.

There is no doubt that the market for derivative securities, such as collaterized debt obligations, collaterized loan obligations, and market-backed securities, were hammered in large measure because of opaque pricing in these markets. When the smoke clears and these markets return to normalcy, regulators should require transparency in pricing information to avoid another panic driven by the absence of credible pricing data.

Focusing on Fundamentals

Is it an unjustified leap of faith to expect the situation will self-correct, or is something more fundamental in the offing? Jacques Rolfo, chief executive officer at CIFG, one of the major triple-A bond insurers, acknowledges there is heightened risk sensitivity in the credit markets. But he believes that "the market is reacting to perceived trends" instead of responding rationally to fundamentals. As a result, he says, "the pendulum has swung too far." Rolfo says "excess liquidity will be flushed out of the system" by market forces. He compared the current credit crunch to past excesses, such as the savings and loan crisis of the 1980s, but notes that the difference this time is that risk is widely spread instead of being concentrated in the portfolios of federally insured thrift institutions. "I see no sign of an enduring major economic crisis," Rolfo says.

If his assessment is correct, the panic selling in the equities market presents steeled investors with a unique buying opportunity. "The equity markets are clearly overreacting to the genuine problems in the credit markets," says John Maloney, CEO at M&R Capital Management, a deep value investor. "There is no question that some financial institutions violated the rules of credit analysis and are paying dearly for failing to exercise credit risk and good balance-sheet management," says Maloney.

He shares Rolfo's perspective that despondent investors may be throwing out the proverbial baby with the bathwater. "The markets are betting on a disaster scenario unfolding, but I don't believe we are anywhere near to getting to such a scenario," says Maloney. He says the current panic has produced some genuine buying opportunities in the U.S. stock market. "As a value investor, I think this is an opportunity to buy some high-quality stocks that until recently were fully priced. I am a buyer here," says Maloney.

Bernie Schaeffer, who heads Schaeffer's Investment Research, says the panic fed on itself, in the same way that bullishness earlier in the year propelled investors to chase the rising stock prices, creating a momentary self-sustaining rally. Investors should keep their heads, advises Schaeffer, and recommends that following the herd, whichever direction it's going, is never a good thing. He also says the current market plunge offers some terrific stock bargains. So go bargain hunting!


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