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Sell, sure, but try to do it on the fundamentals and not in panic

posted on May 21, 2010 at 12:30 pm
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Panic doesn’t change fundamentals.

Try to remember that as what is so far a very scary correction challenges our ability to invest rationally instead of emotionally.

There are stocks that, if you own them, you should think about selling because the euro debt crisis has changed their fundamentals for the worse. This crisis by the time is has finally played out in the form of a convincing rescue package, new financial regulations, and changes in the way that the European Monetary Union works will result in lower growth in Europe, a cheaper euro, and cuts to government spending.

 The European Union is in aggregate the world’s largest economy so a slowdown in Europe is significant.

It means lower demand for such commodities as oil, copper, corn, and fertilizer. It means less growth in revenue and earnings for companies—including U.S.-based multinationals—with big sales in Europe.

A cheaper euro means more competition from Euro Zone companies in global markets and for companies from General Electric (GE) to Canon (CAJ). Besides potentially losing sales to euro-denominated competitors, non-euro-based companies will find it harder to raise prices.

Cuts to government spending, depending on where they fall, could be devastating to industries such as solar that depend on government subsidies for early-stage growth. (Solar stocks sold off yesterday, May 20, on just such fears.) If the cuts get deep enough industries that rely on government loan guarantees or financing could see growth slashed. (Think nuclear power, for example, and high-speed rail.)

All of these are very real ways in which the euro debt crisis is changing fundamentals for companies. And if you own shares in a company or industry that’s seeing fundamental damage from the crisis, then I think you have a rational reason to sell.

But I’d distinguish that kind of selling from panic selling where fear is the guide. Panic selling is selling simply because everybody else is doing it. Panic selling takes you out of the market near a bottom. Panic selling is selling just because the future, in some undefined way, suddenly seems too threatening to bear.

 I understand wanting to protect a portfolio against harm by moving to cash or investing in an ETF that shorts the market or a market sector. That’s perfectly reasonable. I’m practicing a little of that myself in Jubak’s Picks right now on bounces—if and when we get them.

I understand selling now to raise cash because you think there are even bigger bargains ahead. I advised that in my post http://jubakpicks.com/2010/05/18/time-to-start-raising-some-cash-there-are-bargains-waiting-down-the-road/ )

And I certainly understand selling so that you can switch between a stock with damaged fundamentals and undamaged fundamentals.

Anyone trying to practice that kind of selling now can tell you that this is extremely rational and extremely difficult right now. Nothing panicky about it.

But right now there’s a lot of selling just for the sake of selling. I know it’s hard to hold onto perspective when every day brings another decline but it’s good to think back over the last six months and remember all the times investors worried about the sustainability of this rally because we hadn’t seen a good 10% correction.

Now we’re got one. And we should remember that a 10% correction isn’t the end of the world.

I’m not by any means trying to minimize the seriousness of the present market situation. We don’t know, as I posted yesterday (http://jubakpicks.com/2010/05/20/have-things-stopped-getting-worse-faster-sorry-thats-as-positive-as-i-can-get-today/ ) that this is just a 10% correction.

I think we’re near a bottom for this sell off in the range of 1040 on the Standard & Poor’s 500 but I certainly can’t guarantee it. Looking at the likely news flow over the next couple of weeks I think we’re likely to see some improvement from the barrage of incredibly bad news that has fed into this drop. But that’s just my read of the likely news and real events could go in the other direction.

Longer term, say over the next three months, I think stocks are going to have plenty to worry about. I’d be surprised if stocks are a whole lot higher in September than they were at their April highs. So I’m not in any rush to buy on a bounce. I don’t think other investors are either.

And that in itself is a good reason to suspect that this will be a sluggish recovery from this drop over the next few months.

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  • Upside on 21 May 2010

    What do you think about the fundamentals for Central European Distribution (CEDC), down 38% since April 14. Today seems like a good time to buy.

  • taterbug820 on 21 May 2010

    Jim, great post for the novice investor that has been a little confused with the past couple of weeks contradicting posts. ( raise cash, buy american, don’t panic) Thank you for clarifying!
    I also picked up WHR and CEDC yesterday. Although could be selling very soon. Only for a profit though.

  • andante on 21 May 2010

    Some of the companies that are getting a significant amount of their revenue from Europe: McDonalds-40%, Sun Power-60%, Adobe-32%, Electronic Arts-40%, Itron-40%, Activision-40%, etc.. Also, it has been pointed out by tech analysts that the rosy, forward looking projections of many tech companies included a large portion of projected revenue coming from estimated European sales. The names mentioned included: CISCO, MSFT, HPQ, GOOGLE, Oracle, chip makers, and others. Since Europe is now projected to grow at a much slower rate, need to reevaluate your calculations on revenue growth, price targets, etc.. As Jim mentions, this may lead you to sell.

  • dwells on 21 May 2010

    Guess I’m going long on my Jubak’s Picks portfolio. Wish I had sold a month or two ago when stocks like JCI were up 30%!

  • andante on 21 May 2010

    Companies that benefit from weak euro and strong dollar because they have sales in dollars and costs in euros: SAP, ASML, AIXG, Tenaris. German companies that are big exporters and should benefit from weak euro: Siemens, BMW, FMS, BASFY, Daimler.

  • ubergeek on 21 May 2010

    i just bought CMI at $61.82 (limit order I placed last week). I am also going long here.

  • andante on 21 May 2010

    Tech wars are heating up. Google just announced the release of Android Froyo, Google TV, cloud services, streaming media and mobile ads.
    Apple is now on the defensive and MSFT is being left to eat their dust.
    And consider this in your future earnings calculations. Google already a leader in advertising (read revenue generation) was just given FTC approval to buy ADMOB for $750 million to form the largest mobile advertising company. Google’s stock is currently waxing and waning around $472. But it took a few weeks for Apple’s stock to really take off after Jobs presented the iPad in January.

  • rich_126 on 21 May 2010

    Someone mentioned something about learning to short stocks, options, etc. In my view one important thing to learn once you have a decent size portfolio ($100K?, definitely by $250K) is futures.

    I’m not talking about doing really complicated things but it is usually cheaper and easier (once you set up an account) to protect your portfolio in a down market by selling mini-SP500 contracts. Each contract is worth 50X the SP500 value (~$53,500) and the margin requirement is around $5K. Obviously you need more money since each 1% change represents about $500 so maybe you keep ~$10K available for each contract to avoid margin calls. The contracts are very liquid and commissions can be less than stocks (for example thinkorswim charges $3.50 per contract).

    Anytime the market seems kind of high it is a good hedge to sell some contracts to protect you against a sudden/big drop. In my view they are much better than options and trying to short stocks (unless you really know what you are shorting).

    Just avoid trying to use them for extreme leverage since one mistake can cost you greatly.

  • CallOfDutyFan on 21 May 2010


    Thanks for the advice. I will have to play around with my brokerage account to see how I can do that. (I have an account with Fidelity.) I’d better start learning tricks other than the fundamental analysis!

  • rover on 22 May 2010

    Is there going to be quarterly update on your stock picks any time soon? It seems that there has not been an update for several quarters.

  • cwt334 on 22 May 2010

    Jim this does help me clarify my own thinking. Thanks!

  • Seaturtlelady on 22 May 2010


    Your article above had a tremendous “calming” effect, and for that, I applaud your efforts on this site! Thank you for caring about us! :-)

  • yx on 22 May 2010

    You said there are many worries for the stocks in the next 2 or 3 months. What are the “worries” do you think? I know Spain has a much bigger than Greece’s debt to refin in July….Could you give more examples? Thanks

  • DanielX on 23 May 2010

    Well. The question is has the base formed? We’ve got enough “bads”. Is there going to be any more? Don’t know. Are we having a correction, or something worse? If you believe this is just a correction like me, then do you think there’s still more room for the market to go down? Personally i think its much less risky to get in than two weeks ago. If you were optimistic a few weeks ago, (although you were wrong) do you still remember why you were optimistic? Opportunity comes out of sell off. Risk accumulates in continuous rise. This is always true in the stock market. The short term bottom is in front of us. Fear is an enemy of a good trader/investor. Just remember, if you decide to jump in like myself, always listen to the market, instead of letting your belief drive you. The market will tell you everything.

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