Wednesday, March 16, 2011

The only thing we have to fear is fear itself

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The Only Thing We Have to Fear Is Fear Itself
By: Steve Reitmeister
March 15, 2011 | Comments: 1
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The world media has done wonders to stir fears about potential nuclear meltdowns in Japan. Yes, it is a real possibility. Just not as likely as the headlines or glorified reporting would suggest. More importantly, its economic impact on every part of the globe outside of Japan is negligible. Maybe even a net positive as Japan would need a large stimulus plan to rebuild parts of the country.
Please note that I’m not trying to be callous about the personal devastation caused in Japan to date or the potential for more to come. But as an investor I need to cut through the panicked market reaction to assess the underlying dynamics. For me, it is clear that the sell-off is already overdone based upon the fundamentals. Yet still the downward pressure may linger a bit longer because fear is such a strong emotion.
So why are world markets selling off this morning? Because a rise in fear begets a decrease in risk-taking. This leads to stocks getting dumped in exchange for larger cash and government bond holdings. That is the short-term picture.
Over the long haul stocks will trade based upon their ability to generate earnings. So let’s reflect on how even the worst case scenarios in Japan would cause the lowering of earnings power for US companies.
Yes there are some insurance firms who will be hurt in paying out extra claims. And yes, some specific companies may have their supply chains disrupted if they get goods from the affected areas. Overall, the toll on US companies in the short run is very limited. 
The further out you look, the more potential positives will emerge for US companies, as Japan will need to spend massive amounts of money to rebuild their infrastructure. This stimulus spending will have wide-spread benefits within Japan and for their major trading partners: US, China and South Korea.
So how long will the fear stay in place and risk-taking assets remain under pressure because of events in Japan? That is unknown and unknowable.  But if I had to make a guess, it will only be a couple more weeks. Maybe less.

What is the best strategy for investors who already have hefty stock positions? Given that the positive long-term picture for US company earnings is unchanged or maybe even improved, then I say sit tight.
Yes, that means the beatings may continue in the short run, especially for smaller cap or higher beta positions. But at some date in the near future stocks will rebound and head back towards the recent highs at 12,400 and hopefully beyond. When that happens, then these same stocks that took the biggest losses will now reverse course and gain the most. So you don’t want to shed them just when they are about to do you the most good.
If you have a fair amount of cash on the sidelines, then indeed this is presenting a great buying opportunity for you. Just make a list of your favorite stocks (hopefully Zacks #1 Ranks) and look to buy them on these dips.
I know that these are the hardest times in which to enact these strategies. Yet these are exactly the moments that make or break the year.
Weak hands get tossed off the bull. Don’t be one of them. Just keep your eye on the clearer horizon, which bodes well for the US economy and stocks.