I always find it extremely important to communicate with clients, particularly during times of fear and turmoil because our history has proven that the more educated the client, the less inclined they are to panic.  We are clearly in the midst of a global stock panic.  While most would point to a fear of slowing Chinese growth as the primary culprit, it is also important to note that valuations have been very expensive and market participants have had unrealistic expectations in many circumstances, bidding stock prices up to levels that vastly exceed intrinsic value.

Last night China’s Shanghai index was down another 8.5%.  That means that the market over there is now negative despite being up a whopping 60% at its June peak.  Germany’s DAX index was down 6.5% today and is now down by more than 20% from its April peak.  England’s FTSE is at the lowest price since 2012 and we are now severely into correction territory in the U.S.

Below I will list a few common questions that we get in these types of circumstances and I will answer them:


Does the stock selloff mean that we could see another 2008?

I believe that is highly unlikely.  The primary issue in 2008 was a housing and credit bubble, which when it exploded created a devastating recession.  Housing and credit are two of the strongest areas in today’s economy and the fundamentals are solid, with prices still being reasonably affordable.  Most economies are growing including the U.S., Europe, China and even Japan by a slight margin.  This is more of an emerging market issue and stock selloff.  The reality is that these things just do happen.  Stock fluctuate!  It is nothing to be worried about and the best thing to do is just ignore the news and let the strategy play out.  Things can change and markets can move up just as quickly.


On TV they said the market can keep dropping, should we get out of everything now?

Ignore market pundits and don’t worry about short-term predictions as nobody knows, but TV makes a great deal of money when people are freaking out.  You certainly do not want to panic and make rash decisions.  Remember, we are buying fractional shares of businesses at great prices.  You don’t sell your McDonald’s franchise or insurance company because the stock market is down 15%.  I highly advise clients to really ignore their accounts over the short-term, as of course prices will be distorted with volatility being so high.  That is why you hire us.  We are constantly researching and focusing on the investments.

The reason we sell puts is to either generate income, or get into stocks at cheaper prices.  If we thought stocks would just go up, we would only buy stocks.  The puts provide protection, often between 10-20%.  We’ve also exited many profitably throughout the year already.  When we end up getting exercised we often have some of our best gains as the stocks recover, as we get the full benefits of stock ownership.   In 2011, the S&P dropped by about 20% during the year, but then recovered strongly and we posted incredible returns in 2012 and 2013, largely based on those positions established by getting exercised on the puts.

How are our positions?

Our biggest positions are in U.S. based financials.  Most of these companies have some exposure to emerging markets but not very much.  I expect companies like AGO, AIG, Bank of America and Citigroup to post solid earnings and continue to grow intrinsic value.  As long as that happens, the stocks will ultimately catch up.  Of course everything is being sold off now, but that happens when people panic.  The selloff in commodities cuts supplies and will over the long-term help our long-term focused energy positions.  Production needs to come down and prices below $40 will get people to react!  Our options will provide a very important ballast for us and should help us outperform.  The whole key though is letting them expire because time and volatility go to zero.  If you panic and sell them, you get none of the benefits of the options.  There is no reason to do that.

I’ll keep communicating and updating you as things progress.  In all of our emails we have been discussing our concerns over valuations.  This selloff has made valuations much more reasonable!  It is a great time to invest, but it certainly is not the time freak out or panic.  We aren’t in any sectors that are expensive, which have been hit the hardest.  Most of our positions trade at discounts to book value and single-digit p/e ratios on normalized earnings.  Our stocks are over 50% cheaper than the overall market.  Interest rates are obscenely low and the Fed is not likely to raise in September!  We have many stocks that are yielding double or even 3 times what you can get in 10-year treasuries.  Volatility is 100% to be expected and should not be feared.  As always, if you have any questions, please don’t hesitate to contact me 805-886-8140!