Investors Buying The Dogs of 2007
Kurt Brouwer January 2nd, 2008
Lots of interesting cross-currents in the financial markets right now. Fears of a U.S. recession, higher energy prices, continuing woes in financial services and housing are all negatives of course. At the same time, some investors are picking through the rubble to seek out values as this Wall Street Journal article (registration required) points out [emphasis added below]j:
Investors Reconsider The Pariahs of ‘07 (Wall Street Journal, January 2, 2008, Eleanor Laise)
‘Some money managers are starting to wade back into segments of the market that were among the hardest hit by last year’s subprime turmoil — and that is presenting new opportunities, and risks, for individual investors.
Fallout from subprime-mortgage woes and the global credit crunch has weighed heavily on stocks in the financial and housing sectors, and has driven down prices of riskier corporate bonds. But while these assets could still drop further, many mutual-fund managers, Wall Street strategists and financial advisers say they are starting to engage in some bargain hunting.
Mutual-fund investors also are opening their wallets in some hard-hit areas. Investors added about $50 million to financial-stock mutual funds last month, through Dec. 26, after pulling money from these funds in every other month of 2007, according to fund-tracker AMG Data Services. And though investors continued to pull money out of high-yield-bond mutual funds in recent weeks, the outflow has slowed substantially from the third quarter.
The shifting sentiment comes as some foreign governments’ sovereign funds place big bets on U.S. financial companies. Merrill Lynch & Co. last week said it had agreed to sell up to $6.2 billion worth of its stock to Singapore’s Temasek Holdings Pte. Ltd. and to mutual-fund firm Davis Selected Advisers LP. Davis Selected also reported it had bought a greater-than-5% stake in bond insurer MBIA Inc…
We covered this point from the paragraph above in a recent post Davis Selected Advisors Buys Merrill Lynch Stake. The article continues:
…Citigroup Inc.’s Citi Global Wealth Management is calling for a rebound in financials in 2008. IMS Capital Management’s Capital Value and Strategic Allocation funds have begun buying home-builder stocks. And Deutsche Bank Private Wealth Management says that “junk” bonds, issued by companies with lower credit ratings, are now giving investors good yields in exchange for their added risk.
But investors need to step carefully. No one knows the full extent of the subprime problems, and many beaten-down stocks may fall further or simply take years to get moving again. Many investors also may already be heavily exposed to financials through a broad market holding like an S&P 500 index fund.
A slowing economy, or possibly even a recession, poses added risks. It could prolong the pain for financial firms and home builders. And while high-yield bonds may appear more attractive than they were earlier last year, the current low level of defaults is expected to rise…’
It is always difficult to call a bottom, whether it is a group such as financials or in the stock market overall. Those who are stepping in and buying now must believe that the valuations are so compelling that some timing risk or uncertainty is acceptable. For more on this topic, see Bill Miller of Legg Mason Value Trust: Buy Battered Financial & Housing Stocks and Buy When the Bonds Are Flooding the Street.
- Investing , Mutual Funds , Personal Finance
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