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Market Back at Recovery Highs…What to do now?

November 2, 2010

What to do now? The stock market has recovered from its summer swoon and is now back at its recovery high. Some have asked what to do now as they feel they may have missed the opportunity to buy.

Do not be scared by PIGS and HOGS. The summer swoon was a simple reaction to the large gains the market had experienced from March of 2009, with the media having a field day with the financial deficits of Portugal, Ireland, Greece and Spain. Can you believe it, the media actually called these nations PIGS and got away with it. Will they coin HOGS next? To be sure, some of these nations are in trouble and more pain may follow. However, we suggest that people think long term as such difficulties and corrections are a way of life in the stock markets and so one should not be scared so easily by the media.

The headlines may be poor, but a lot of companies are not. The headlines remain poor, focusing on issues like high unemployment and tensions surrounding the value of some major currencies. But, it should not be lost that significant efforts such as accommodative monetary policy are being undertaken to rectify the situation. Ultra low interest rates will eventually help the economy and the stock markets. Major corporations remain profitable as they have laid off many workers and are scrounging for saving in every possible corner.

Stocks remain quite undervalued. Stock prices are also likely to move higher due to the very low yields available on interest bearing securities. Currently, there is hardly anything significant to be had from buying bonds or depositing money in the banks. The dividend yield alone on the stock market exceeds the interest rates on deposits! Stocks therefore remain quite undervalued. The earnings yield on major corporations is substantially higher than prevailing bond yields, which means it is worthwhile to buy and hold stocks. Such undervaluation is not lost on some corporations and they are rapidly buying out other enterprises such as BHP’s $39 billion USD bid for Potash.

We are certainly buying stocks ourselves. We therefore urge investors to not hold back on investing just because the markets have recovered to their previous highs and rather, think long-term and add to high quality stocks that remain vastly undervalued, as long as their risk parameters allow them to do so. We certainly are doing so for ourselves.

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