Sunday, August 12, 2007

One Risk and One Opportunity

In my weekend readings - trying to figure out what is going on in the markets - I came across two interesting comments in Barron's. One is a frightening, and lingering risk, and one is a stunning and immediate opportunity.

The risk is this: If the credit crunch continues, the Fed will be compelled to lower the discount rate to return liquidity to the system. A rate cut will hurt the dollar, and foreign capital may flee if the dollar begins to fall. As a result, credit could tighten even as the Fed eases.

The opportunity is this: many long-short quant hedge funds buy value (i.e. low P/E, low price/cash flow, etc...) stocks and short high priced stocks. As these funds have been hit by paradoxical market action in early August, and because many of these funds use leverage, they have been bailing out of value stocks with a vengeance. I've been affected by the deepening of value myself, as a value portfolio I have been holding since January 2007 was up 35% in early July, but is now up only 15% (losing 10% alone in the past week). The stocks that value-seeking hedge funds are bailing out of have actually become very cheap -- presenting great opportunities for value investors (and I have a feeling that many will become even cheaper). Later I'll post some of these bargain stocks' names, when the coast is clear. I don't think this is a good time to buy.


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