Iron Capital Insights

  • Iron Capital Insights
  • May 20, 2010
  • Michael D. Smith

A Greek Tragedy

Today marks the first technical correction (commonly defined as a price decline of at least 10%) that we’ve seen since the beginning of the current bull market that began in March of 2009.  We first referred to the possibility of a correction in our February 4th Insight and while we were a little early in our prediction, we aren’t surprised at the outcome. Once again, fear rears its ugly head as worry over Europe and the uncertainty surrounding financial reform continue to weigh on the minds of investors.

The debt crisis that started in Greece has proven somewhat contagious, negatively affecting markets throughout Europe.  The bailout proposed by the European Union has failed to calm investor worries and, this week, Germany chose to halt the naked shorting of some European bonds and also banned the use of some credit default swaps.  This unilateral action by Europe’s largest economy paints a picture of a divided Europe, as opposed to a Europe presenting a unified front to tackle the tough decisions ahead.  The U.S. Senate is also tackling financial reform this week, which introduces additional uncertainty in an already tumultuous market.
While the economic situation in Europe and the threat of punitive financial regulation are troubling and causing short-term volatility in world markets, it is important for investors to stay focused on the long-term earnings picture.  Approximately 75% of companies in the S&P 500 have outperformed expectations for quarterly earnings.   Also, companies’ aggregate cash levels are at all time highs, balance sheets are strong and free cash flows are impressive.  In general, the companies that make up the backbone of our economy have gotten healthier.  We view these as positive signs.  It is also important to note, once again, that corrections are a normal part of a well-functioning market and present opportunities for long-term investors at the expense of speculators.
We are ever-vigilant about the prospect of a bear market and are watching carefully as events unfold in the global markets.  We continue to believe this is a technical correction within a longer-term bull market but stand ready to take action in the event our view changes.
Michael D. Smith
Investment Analyst