Global markets took a big dive today. The TSX Composite closed down 4.6%, following the plunge in other stock markets - Japan down 3.9%, Germany down 5.35%, UK down 3.9% and France 4.5%. Emerging markets were hit hard as well - Hong Kong down 5.5%, China 5.1% and India 7.4%. The only port in this storm has been bonds with 5-year Canada bond yields dropping to 3.47%. US markets were closed for the Martin Luther King holiday but press reports suggest that Dow might open as much as 500 points lower on Tuesday.
I don’t know if today marks the bottom of this sell-off but I’m staying the course and doing nothing. At times like this, it is reassuring to look at valuations, which I believe are reasonable. The S&P 500 sports an earnings yield (inverse of the traditional p/e ratio) of 7.6% (based on Friday’s close and estimated earnings for 2008), a spread of 4% over bonds. I’ve been a bit early with REITs in our portfolios but you can only pick the precise bottom through sheer luck. However, I am glad that I picked up bonds last summer when 5-year Canada bonds at yields ranging from 4.3% to 4.5%. I’m still underweight emerging markets in our portfolios and I’m hoping for a buying opportunity in the Vanguard Emerging Markets ETF (VWO).
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18 responses so far ↓
1 The Dividend Guy // Jan 21, 2008 at 10:24 pm
I agree CC - I am holding tight and just going to continue on auto-pilot with my pension and employee stock purchase plan. I may also be putting some money to my RRSP to fill out some spots in my asset allocation.
The Dividend Guy
2 Y HAT // Jan 21, 2008 at 10:25 pm
CIBC put out a good piece on REITs last week arguing they are currently “oversold”. I currently don’t own any in my portfolio and am thinking it might be a good time to buy.
3 FinancialJungle.com // Jan 21, 2008 at 10:37 pm
I agree that the 4% spread of S&P500 earning yield over bonds is compelling. Have your bonds appreciated to the point where you can rebalance into beaten up equities?
4 FinancialJungle.com // Jan 21, 2008 at 10:49 pm
>>”I’ve been a bit early with REITs in our portfolios but you can only pick the precise bottom through sheer luck.”
Which is why you dipped only one toe into Riocan, as I recall. This is one valuable lesson I learned with BMO. Never go all in too early.
5 FourPillars // Jan 22, 2008 at 12:19 am
I’ve bought a few Cdn banks last week for the leveraged portfolio.
FJ - funny u mention BMO - I learned the same lesson on the same stock. Now I’m pacing things out a bit. I think this sale might be on for a while..
REITs. I’ve been thinking of selling some short term bond XSB and buying RioCan - might do it this week and finally get some REIT into the ol’ portfolio.
VWO - I’m still waiting - I might never buy but I’m still waiting.
6 pessimist // Jan 22, 2008 at 12:22 am
i waited patiently for VWO to fall under 100 for months. i’ll buy when it drops 10% from when i bought it last, i said to myself. it did and i bought in last week. it fell to 93 the next day and tomorrow is going to be even worse. when will this end?
7 Canadian Capitalist // Jan 22, 2008 at 11:29 am
FJ: I’m now fully invested in RioCan. I bought it in three stages and I’m happy with the prices I paid. Yes, it might still go down from here but I’m very happy with a 4%-5% real yield.
8 Phil S // Jan 22, 2008 at 11:33 am
I was also caught a bit offside as I had just deployed about $70K of cash into the stock market (mostly in REITs like CC, but also some financial services) just before the recent plummet. I still do have a bit of dry powder left in the keg, so I’m also waiting for everything to find the bottom before diving in with both feet.
Kevin O’Leary on BNN has a good philosophy for identifying when the market has hit bottom. Before the market hits bottom, bad economic news will drive the stock market lower. When bad economic news stops creating downward pressure on the broader market, that’s when we’ve hit bottom. In applying this philosophy, we definitely still have not hit the market bottom yet.
9 Canadian Capitalist // Jan 22, 2008 at 12:29 pm
Phil: I’ve never been good at picking bottoms but I am happy to invest some more when markets are falling like it did in Feb. ‘07 and Aug. ‘07. I wish I had known that if I had held off till now I could get cheaper prices. But we can’t predict these things and it’s funny to hear market analysts confidently predicting how investors should brace for further declines.
10 Canadian Capitalist // Jan 22, 2008 at 12:38 pm
pessimist: Even at these prices, I believe emerging markets are overvalued. There will be plenty of opportunity to pick up VWO in the future when investors find out that there is extra risk in emerging markets and demand better valuations.
yhat: Yes, I believe REITs are good value at this point. YMMV.
11 FourPillars // Jan 22, 2008 at 1:11 pm
Phil - when you determine when the exact “bottom” occurs, please let us know (after you do your trading of course!).
Mike
12 FinancialJungle.com // Jan 22, 2008 at 3:13 pm
After yesterday’s buying spree, I don’t have much dry powder left. I’ll be done with one more deep correction.
It’s time to rebuild my reserve by brown bagging more often.
13 Phil S // Jan 22, 2008 at 3:20 pm
FP. It’s Kevin O’Leary’s philosophy and it’s a news driven philosophy. If we get a piece of bad economic news on the business news and the market doesn’t react negatively to it, then we’re at a market bottom. Today the Federal Reserve had an emergency interest rate cut of 0.75% and it sent their markets tumbling. Hence, we’re not out of the woods yet.
Of course, it all depends upon whether you believe the analysts who say that Canada’s economy has effectively decoupled from the USA or not. In my personal opinion, with the USA being Canada’s biggest customer, when the US economy sneezes, then Canada’s economy catches a cold.
14 FinancialJungle.com // Jan 22, 2008 at 3:59 pm
>>”Today the Federal Reserve had an emergency interest rate cut of 0.75% and it sent their markets tumbling. Hence, we’re not out of the woods yet.”
S&P500 would’ve been down ~5% yesterday, and losses would’ve extended another ~5% seeing all Asian markets opened in deep red territory on Tuesday morning. S&P500’s 1.5% retreat, to me, is a significant rally.
15 FourPillars // Jan 22, 2008 at 5:20 pm
I agree with FJ - the Fed cut made a big difference in the markets today (both US and Can.).
My opinion is that nobody can predict the bottom.
Mike
16 Phil S // Jan 22, 2008 at 7:49 pm
FJ. I just got home and took a look at my portfolio and indeed my interest sensitive stocks in the USA had a nice pop to the upside today. Interesting.
17 Canadian Capitalist // Jan 22, 2008 at 7:58 pm
The 75 basis points cut was a stunning move by the Fed. The interesting tidbit in the Bank of Canada rate cut announcement is that the bank expects inflation in Canada to be only 1.5%. More rate cuts are likely from our central bank and that should put a floor on the financial stocks.
18 Are you comfortable with your portfolio? // May 6, 2008 at 11:09 pm
[...] the reasonable course of action when markets are correcting is not panicking and staying the course, now may be the time to revisit your asset allocation in light of your reaction to falling stock [...]
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