Two Legendary Investors, One Piece of Advice

Equity markets stumbled badly last week.  The S&P500 lost 4.2% and it could have been worse.  Volume was high–confirming the validity of the sell-off.  And the VIX (or fear) index soared to late 2008 and early 2009 crisis levels.  Investors (and traders) are running for the hills, and they may not be done selling.

While it wasn’t the primary reason behind the selling, most of the economic news was poor.  The Empire State manufacturing survey came in well below expectations.  Housing starts were solid (but only because of the now expired tax credit); but housing permits–providing a clue of what lies beyond the tax credit stimulus–were dismal.  Producer prices and consumer prices were generally lower than expected, suggesting that inflation (in goods and services, as opposed to financial assets) is showing no signs of strengthening.  Initial jobless claims severely disappointed by rising to 471,000, when they were expected to fall to 440,000.  Leading indicators and the Philly Fed survey both missed to the weak side. 

The economy is showing signs of slipping, precisely when the inventory boost to GDP is waning and the fiscal stimulus is fading.  It does not seem that economic growth is poised to increase as many forecasters had hoped by this stage in the so-called “recovery”.

Technically, the S&P500 is somewhat oversold on a daily basis.  It would not be surprising to see a bounce back next week or the week after.  But the S&P is still overbought on a monthly basis.  The breakdown that began three weeks ago looks like it has barely begun.  On the monthly charts, there appears to be much more downside risk over the next one to two months.

Legendary investors Seth Klarman, the founder of the Baupost Group, and Mohamed El-Erian, the CEO of PIMCO, recently updated their outlooks on the global economy and markets. 

Mr. Klarman, who expressed an extremely bearish viewpoint in The Atlantic almost two years ago, told a group of CFA’s at a conference in Boston that he is “more worried about the world, more broadly, than [he has] ever been in [his] career”. 

Mr. El-Erian, in an interview on CNBC last week, asserted that the world’s leaders, especially in Europe today, are still not comprehending the fact that the core problem for many nations is a solvency crisis, not a liquidity crisis.  Many nations are at risk of going bankrupt due to overspending and overborrowing; they are not merely short of cash–temporarily.

But remarkably, both said something very similar about what investors should “actually do” now to prepare for the upcoming turmoil.  Both said that investors should do nothing today, except prepare a list of companies they’d wish to buy–at much lower prices. 

They both said that the challenge will be to remain patient, for a while.  But when the panic sets in, having the carefully prepared wish-list ready will allow investors to do what almost no other investors will be able to do–BUY when everyone else will SELL. 

Have you prepared your wish-list?

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