NEW YORK – The prospect of buying stocks may unnerve even the most seasoned investor these days, given the continued uncertainty over how the nation’s banking landscape will emerge from a historic bailout by the federal government.
Ron Muhlenkamp, who founded investment firm Muhlenkamp & Company Inc. in 1977, discussed how the government’s $700 billion bailout package and other forces are impacting investors.
Daunting as it may seem, Muhlenkamp said, those who buy at today’s prices and hold for about five years will likely reap a solid profit.
Q: Where are we in the market right now?
A: As an investor I’m caught between two things. I’m seeing great companies selling dirt cheap – the best prices I’ve ever seen.
But money managers are also being forced to sell assets and we don’t know where we are in that process. The combination of deleveraging by hedge funds, redemptions by any funds and the fact that we don’t quite know what the rules are and this whole mark-to-market selling which has been engendering more forced selling. (Under the mark-to-market standard, companies must value securities they hold, such as mortgage-backed notes, at their current selling price.)
Between all that, we’re in a spiral that we’ve probably never been in.
Q: What companies look attractive at the moment?
A: Today (the top name companies) the Cadillacs are on sale. I’d say when the Cadillacs are on sale, buy the Cadillacs.
We think General Electric is a Cadillac, we think IBM is a Cadillac, we think Cisco is Cadillac. These companies have franchises not only in this country, but I don’t think there’s another Cisco in the world.
Q: How is the government bailout affecting consumers?
A: When the credit market problems look like they might flow over into Main Street, the government puts up a wall. They guarantee deposits and money market funds. The shareholders of Bear Stearns, Lehman Brothers, Merrill Lynch and Goldman Sachs (on the other hand) have all been decimated.
With AIG, the shareholders got nothing, but the government protected the insurance business – the customers.
The most telling example is Fannie Mae and Freddie Mac. The government guaranteed the bonds, which is why we can still get a mortgage. So if they’re not bailing out Wall Street, how is the general consumer being affected?
Mortgage rates have been stable. Crude oil ran up, but has given it back. Natural gas is actually below where it was two years ago. Corn and soy beans ran up, but has given much of it back.
The point is, food, fuel and shelter are where they were two years ago. If you’re an American consumer and you don’t lose your job, six or nine months down the road you’ll loosen up.