Thursday, August 16, 2007

Candy Shop

"Be fearful when others are greedy and greedy when others are fearful." Warren Buffett

It was only about a month ago that the Dow had surpassed the 14,000 mark. Today, the Dow crashed down close to the 12,500 level. Yours truly felt like I was in a candy shop. The are too many opportunities to list but I hope you were sitting on some cash to be able to take advantage of Mr. Market's generous overreaction. As is often the case, we have gone from one extreme to another. The word 'liquidity' has now been replaced with the words 'credit crunch'. Financial stocks are getting punished and the stocks of numerous companies which were the target of private equity buy-out offers have been dragged lower. We will see how all this plays out. Certainly it is too early to call today's late market recovery an end to the volatility. Problems could still spread to other parts of the U.S. economy and with global implications.

But opportunities to profit from this turmoil in the long-run abound. I have continued to add to my positions in companies such as Citigroup (NYSE: C), USG (NYSE: USG) and Cadbury Schweppes (NYSE: CSG). I have initiated new positions in battered companies such as Lehman Brothers (NYSE: LEH) and Moody's (NYSE: MCO) (the latter 3 stocks are also newcomers to the Model Portfolio). Lehman will get through all this just fine and I will gladly add to my position should shares decline further from here. Moody's has ONLY been around since 1900 and basically forms a duopoly with Standard and Poors as the two dominant rating agencies. This time around the company may have its hands full with regulators because of its role in accelerating the adoption of fancy financial derivatives tied to subprime mortgages which are now wreaking havoc on the financial markets. But the company will make it through this downturn just as it has in the past. For good measure, the company has just doubled its borrowing capacity so it can buy back even more of its stock (Moody's already spends most of the oodles of cash it generates each year on buybacks). The news on housing and subprime probably won't get better anytime soon. But this is exactly what you want. Mr. Market's candy shop is open for business. Be greedy when you walk into the candy shop.

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