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Concerns about excessive debt and slowing economic growth in the U.S. and Europe resulted in mounting losses on Wall Street and most of the world's markets. Signs of distress are everywhere: The Treasury 10-year note yield has fallen to a miserable 2.07%, its lowest level since 1962. Gold is rapidly approaching $2,000 an ounce. Shares in the U.S., Germany and China all fell sharply last week.
With this gloomy background it's tough to find a reason -- or perhaps the courage -- to get positive. There's some hope that Fed Chairman Ben Bernanke will come out with a new plan to aid the markets this week when he speaks at the annual Jackson Hole, Wyo., conference.
But even if the Fed chairman does unveil something akin to QE3, markets might yawn. For today's problem is not liquidity. The markets are awash in cash. The problem is too much debt at the governmental level, which has yet to be addressed. And until it is, the markets may continue to tumble, taking their pound of flesh.
One trader would like to see the U.S. actually cut entitlement programs and see the Greek government restructure its debt. "We need to stop kicking the can down the road," he says.
Stock vigilantes may finally force the politicians to get their fiscal houses in order. Near term, that could send markets lower, but long term it should result in a better environment for investors.
A major problem for investors today is that even "safe havens" don't look quite as safe as they once were. Gold is up 50% over the past year, setting a record on Friday, and the TV is chock full of commercials enticing you to buy glittering coins and bars. That certainly looks and smells like a market verging on frothy.
Even parking funds in cash can mean a loss of principal these days. Bank of New York Mellon (ticker: BK) announced recently it may charge 0.13% on cash balances over $50 million at the bank. And the same could easily happen at money-market funds, where the yield on investments -- around 0.57% -- isn't high enough for some funds to charge management fees.
And though it's often overlooked, inflation is taking a good bite out of returns these days, too. The year-over-year core consumer-price index is up 1.8%. Subtract that from any meager yield your cash-like investment is earning, and you might find your cash is actually losing value every day. "You're being penalized for parking your cash," notes one bond analyst.
PERHAPS THE MOST POSITIVE THING to be said about today's stock market is that it already reflects an awful lot of bad news, and companies have balance sheets that are vastly improved since the 2008 downturn. One example: Corning (GLW).
Shares of the glass manufacturer have fallen 38% to $14.32 from roughly $23 in February. "I've followed this company for my entire career," says Edward Shill, chief investment officer at QCI Asset Management. There are times to buy and times to sell, and of late, Shill has been buying. He sees maybe $2 to $3 of downside risk and $10 of opportunity.
Shares reacted to the company's lowered estimates for this year's sales of LCD (liquid crystal display) glass, which goes into flat-screen televisions. Its customers have been reducing inventories in expectation of a slowdown in TV sales. "Panel makers have historically reacted to TV sales," says Shill. "Now they're trying to predict TV sales."
Corning's other businesses have become a larger part of the mix, and they're growing rapidly. The LCD business contributes just under 40% of revenues, with the rest of the company's sales coming from items like fiber used by the telecom industry, exhaust-pollution filters for trucks and cars, and Gorilla Glass -- a super-strong glass used in cellphones, tablets and laptops.
Corning's balance sheet is in fantastic shape, with $6.4 billion of cash and short-term investments, more than offsetting $2.3 billion of debt. In the last downturn, when shares traded down to $8, the company's balance sheet was is such dire straits that the company's solvency was a concern.
Now Corning's shares trade just north of book value and at only 6.6 times the $2.16 it's expected to earn in 2012. The icing on the cake: In early August, Chief Financial Officer James Flaws purchased 75,000 shares at roughly $13.50, spending a cool $1 million of his own money.
The purchase "demonstrates my belief in the company," says Flaws. While he declines to say what he thinks the shares are worth, Flaws would say that "at $13.50, it went below fair value."
E-mail: editors@barrons.com
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