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The Ministry of Silly Stocks

Remember British comic troupe Monty Python’s “Ministry of Silly Walks” skit? John Cleese is the dedicated public servant who soberly helps his ministry develop silly walks, each more bizarre than the last.

It’s a nice metaphor for the increasingly odd behavior of global markets that seem out-of-step with reality, but which is creating some great investment opportunities for those who can look past the absurdity.      

The latest global selloff has been on news that Britain is considering exiting the Eurozone, a move called “Brexit,” like the threatened exit of Greece was called Grexit. A week and a half ago there was similar silliness, and a not-so-silly sell-off, based on global banks being at risk. We investigated and could not find support for it in our story Strange Days in Global Banking.  

We not very concerned with this latest selloff in European stocks because most of our Global Income Edge holdings in the United Kingdom are diversified, global multinationals that derive their income from across the world.

The British will vote on June 23, and we think best option is for Britain to stay in the Eurozone.  Leaving it would mean renegotiating a slew of trade agreements with many countries, the end result of which will have a small benefit or even hurt its current trade status. The Financial Times recently reported that the bosses of about half of Britain’s 100 biggest companies were planning to sign a letter backing Prime Minister David Cameron’s fight to keep the country in the Eurozone.

Meanwhile, the overreaction to the Brexit shows global markets selling on fear rather than the fundamentals.  Here are three clear examples;

Overreaction #1 Equities falling with Oil Prices

Oil prices have become a proxy for global growth: the lower the price, the less growth, so the thinking goes. But oil prices are low mainly due to oversupply. We suspect the selloff has been driven by big institutional funds that took losses in China and had to sell blue chip stocks to raise cash; sovereign wealth funds that have had to sell blue chips to raise funds in the face of losses; and fear.    

Low oil prices are actually net bullish, as they mean an incredible transfer of wealth to consumers that will strengthen spending and support corporate earnings.   

Overreaction #2 Banks Stock Selling

Banks were again sold off again this week. There’s no clear reason why, but we are actively monitoring the situation.

In fact, at the G-20 meeting, Jack Lew, secretary of the U.S, Treasury, has all but declared the rout in financial stocks a red herring, saying to Bloomberg news: “Don’t expect a crisis response in a non-crisis environment… This is a moment where you’ve got real economies doing better than markets think in some cases.”

Overreaction # 3: Weak Emerging Markets

The market rout in emerging markets in Asia and Latin America has been bad. But many global corporate CEOs say they still believe Asia and Latin America are on track to become major contributors to global growth.

My view was recently validated by the chief investment officer of Morgan Stanley’s Wealth Management unit, Mike Wilson.  In a note titled, “Fundamentals versus Fear,” he said the market is oversold, having dropped 15% on average globally in just two months. “Has the world really changed that much?” he asked. 

In his research note he pointed to a weak fourth quarter GDP because of inventory drawdowns, but noted that at the same time personal consumption remained strong, as did employment.  

And January’s national retail sales beat lowered estimates, showing an acceleration of 3.5% on a year-over-year basis, Wilson noted, adding that perhaps consumers are finally spending the oil dividend.  

And the fact that earning are not deteriorating is another compelling indication that markets are overreacting.  

Also, he Fed found that GDP has risen substantially in the past few weeks and currently predicts 2.7% GDP growth for the first quarter. And the story seems to be the same in Europe, where firms’ earnings are strong.

So while the markets continue their silly meandering, earnings, consumer spending and economic growth march steadily forward.

In the subscriber section, I profile a European hotel group in our Conservative Portfolio whose earnings and increased dividend are defying the doom and gloom in the market. And in the coming weeks, we will be identifying new undervalued investment opportunities.   

 


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