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Forbes Financial Round Table: Henry Mercer
HENRY MERCER
President, Mercer Capital Advisors
I'd like to just give a quick summary for my outlook for 2008 with the following disclaimer by the famous investor Yogi Beara: predictions are difficult, especially about the future. [LAUGHTER]
But, looking back at 2007, it was a year of bipolar halves -- one euphoric and prosperous and the other panicky and treacherous. Investors' spirits surged in the first half of 2007 as the major indices rallied to new highs. Unfortunately, the remainder of the year witnessed a crescendo of crises such as the housing bust, sub-prime debacle, huge write-offs, broken M&A deals, CEO sackings, oil making a run at $100 a barrel. It's a long, long list.
Well, the stock market has only become more depressed in the first few days of the New Year. Oil briefly touched $100 and weak economic data has many uttering the recession word. The tape has certainly taken on a recessionary character. Stocks have slumped noticeably. The S&P has already given back in the New Year all its gains of 2007.
Market forecasting is not our game at Mercer Capital, but we don't think it's the end of the world. We have a hunch that the pattern this year may be the opposite of 2007 with a difficult first half and a stronger second half. In fact, the worse things get in the early days, the better the remainder of the year might be.
The encouraging thing from our point of view is that the excesses occurred in the debt market, not the equity market. Equity valuations are quite reasonable. Furthermore, the Federal Reserve seems aware of the economic danger in that many of the world central banks have responded to the credit crisis with unusual, albeit unproven, liquidity measures. The Fed has cut rates three times. Treasury yields are now well below Fed funds and short-term treasury yields. This indicates that additional cuts are likely. Historically, multiple rate cuts have been bullish for stocks and we hope that will hold true in 2008.
Yes, a growing number of strategists are worried that the combination of simmering inflation and the feeble dollar will prevent the Fed from more aggressive easing, but I think it will do whatever it takes to keep the economy from imploding.
History shows that the ideal time to buy is when pessimism is rampant and we can think of few times when the investment background was so gloomy. Since last summer, newspapers have been filled day after day with dire economic and financial headlines. I've kept a daily market logbook for the past 20 years and I have to say since last summer I just had pages and pages of bearish headlines.
So, hopefully, much of the bearish news is close to being discounted. The stock market has a curious way of rallying before all uncertainty is removed. Besides, on a day-to-day basis, the best thing to do is filter out the market noise and focus on investment bargains. The market's recent turmoil has created some outstanding value, particularly for the patient investor. So, if stocks continue to weaken in early 2008, I recommend following the advice of the legendary Warren Buffett who once said to be greedy when others are fearful.
I agree with Doug in that we are finding the best value in mega-capitalization U.S. companies. Many of them have dominant global franchises and I'd be happy to discuss them later.
WALLY FORBES: Thank you very much, Henry. Byron, will you go next?
Next: Forbes Financial Round Table: Byron Wien
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