Posts Tagged ‘Fears’
Thursday, July 5th, 2012
by Peter Tchir, TF Market Advisors
The Fed does everything it can to keep Libor low
This chart says it all.
The Fed cannot affect LIBOR directly, but in general LIBOR trades in line with Fed Funds. You can see that historically as Fed Funds was changed, LIBOR responded appropriately. There was typically some small premium to reflect the “credit risk” of banks versus the Fed, but it was relatively small, and fairly stable. 3 Month LIBOR would deviate a bit as rate cuts and hikes were anticipated in the market, but in general, it was a fairly stable game.
That all started to break down in 2007. We saw the first real signs of LIBOR deviating from its normal spread to Fed Funds in the summer of 2007. The Fed responded by cutting the “penalty” rate for using the discount window, and in fact encouraged banks to use the discount window (I still can’t shake the mental image of someone sitting in a dark basement with a green eye-shade doling out money to banks that request it). Then the crisis got worse. Bear needed to be rescued. Facilities such as the Term Auction Facility that had been put in earlier were increased in size. The Fed backstopped some portfolios that JPM acquired as part of the Bear Stearns deal.
As the crisis re-ignited in the late summer of 2008 and peaked after Lehman and AIG, the Fed took step after step to reduce borrowing costs. The Fed was blatantly clear that it wanted borrowing costs to go down. They had the obvious tool of reducing Fed Funds to virtually zero, but when LIBOR didn’t follow, the Fed took further action. The Fed did not want bank borrowing costs to be high.
They increased dollar swap lines so foreign banks could borrow. The Fed stepped into the commercial paper market so banks wouldn’t have to use money to meet drawdowns on revolvers. TALF was another creation to take pressure of bank lending.
The FDIC allowed banks to issue bonds with FDIC backing (so not quite Fed program, but who is going to quibble).
Fears that MS and GS and GE would topple the banks were alleviated by making them banks.
The list goes on. The Fed has done a lot and trying to control LIBOR as a key borrowing rate is one of the things they have worked on, both directly and indirectly.
Tags: 3 Month Libor, Aig, Auction Facility, Bear Stearns, Bonds, Credit Risk, Dark Basement, Eye Shade, Fdic, Fears, Fed Funds, Foreign Banks, Green Eye, Lehman, Manipulator, Mental Image, Nbsp, Portfolios, Stable Game, Term Auction, Tf, Trades
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Thursday, June 7th, 2012
by Dr. Ed Yardeni, Yardeni Research
What’s the difference between a correction and a bear market? The conventional definition is that the former is a drop in stock prices that falls short of a 20% decline. Anything beyond that is a bear market. A correction tends to be caused by falling valuation multiples (P/Es), triggered by fears that earnings will drop. If earnings remain stable or continue to rise, contrary to expectations, then the P/E rebounds and the bull market resumes. If earnings do fall, then P/Es may continue to do so too, resulting in a bear market. So corrections are panic attacks that aren’t validated by the fundamentals. We had a nasty correction two years ago and another one last year. It is happening again this year:
(1) During 2010, the S&P 500 forward P/E dropped 22% from a high of 14.7 on January 11 to a low of 11.4 during August 26. However, forward earnings rose all year. So the 16% correction in the S&P 500 from April 23 to July 2 was reversed by the end of the year, with the P/E ending at 13.1.
(2) During 2011, the P/E fell 25% from 13.6 on February 18 to 10.2 on October 3. Forward earnings rose during the first half of the year and remained mostly flat during the second half at a record high. So once again, the market recovered and closed higher by the end of the year with the P/E rebounding to 11.7.
(3) During 2012 so far this year, the P/E peaked at 13.0 on March 26. It was down 11% to 11.6 yesterday, just about matching the 2010 low, which was 11.4. The S&P 500 is down 9% from its high on April 2, which is still just a garden-variety correction. Meanwhile, forward earnings rose to a new all-time record high of $111.27 during the week of May 31. At this level, a retest of last year’s panic low P/E of 10.2 would push the S&P 500 down to 1135, which would be a 20% decline from the year’s high on April 2.
As you can see in our Earnings & Valuation: S&P 500 Blue Angels, the market’s volatility is attributable almost entirely to the volatility in the P/E. Earnings expectations tend to change more slowly and smoothly. The one exception is during recessions, when both variables take a dive. During the bear market from October 9, 2007 through March 9, 2009, the P/E plunged 32% from 15.1 to 10.2, with forward earnings diving 29%. The P/E actually bottomed at 8.9 on November 20, 2008.
Today’s Morning Briefing: Corrections vs. Bear Markets. (1) P/E times E. (2) Corrections are driven by P/E. (3) Bear markets caused by earnings recessions. (4) A review of recent history. (5) Just another correction? (6) Earnings and valuations plunged during Great Recession. (7) A relatively optimistic outlook for revenues. (8) Profit margin going nowhere for a while. (9) Corporate cash flow hit by smaller depreciation expenses. (10) Wisconsin’s winner. (11) PATCO for public employee unions. (More for subscribers.)
Tags: Amp, Bear Market, Bear Markets, Blue Angels, Conventional Definition, Decline, Dr Ed, Earnings, Ed Yardeni, Fears, Garden Variety, Nbsp, Panic Attacks, Rebounds, Retest, Second Half, Stock Prices, Time Record, Yardeni Research, Year 1
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Thursday, May 24th, 2012
by Peter Tchir, TF Market Advisors
The market continues to trade with extreme volatility. Yesterday’s decline was deep and painful, only to be followed by an equally vicious rally on rumors of a rumor. This morning has already seen Europe rally, fade, then rally again. The overall theme remains the same, with concerns about Europe being counterbalanced by hopes of central bank action and government policy. Maybe as a bank bull down here, I am reading too much into it, but the whale trade fiasco seems to finally be getting put into perspective. That is good for JPM and the financials and the market.
The fear that the EU is preparing a plan for Greece to exit seemed like the worst excuse to sell off that the market has used. There is a real chance Greece will exit. Without significant concessions from the ECB and Troika, it will be there only option. I would much rather that Greece planned for it rather than just gave it a shot. Any hope of a Grexit not being incredibly disruptive to itself and to the rest of Europe will depend on planning. Real planning, not the typical EU style that assumes the market will do what it would like, but one that puts some stresses on the potential outcomes and works hard to deal with them. Given how much money the ECB and Troika are on the hook for, the concerns of deposit flight in other countries if redenomination risk rises, the EU will have to be very careful what it does. I think that as the EU actually works on some plans (shocking that it hasn’t yet) their concern for their own safety and their ability to really manage the worst case scenario will come into doubt, and they will make some concessions with Greece to give everyone time.
And timing is everything. Lots of people are asking what changed from Friday, or from yesterday afternoon. The answer is very little. But what actually has occurred from 2 weeks ago when the S&P was 1,357. The answer there is also very little. Fears of an imminent Grexit have been overblown. That has been our message. Neither side will have the guts (nor stupidity) to rush this decision. It will take time. Time is key because it does give hope that enough can be done that the exit doesn’t turn into a full blown crisis in Europe and that risk of currency flight in Spain and Italy can be contained. Timing is key, because without imminent catalysts, the oversold conditions and “carry” can come into play. RSI, as simple as it is, remains one of my favorite indicators. So much bearishness has been stuffed into the market, that the ability to rally on next to nothing remains high. We even ignored some okay housing data, which only 2 months ago everyone agreed was the key to a successful recovery.
Shorting credit is expensive. Everyone seems to forget about that. Seeing IG18 blow out from 93 to 123 reminds everyone how cool it is when credit blows out. HYG down from 91 to 87.5 is another great example of how quickly credit moves. Spanish CDS at 540 and still near the record highs posted last week is another example where it blew out from a low of 355 in March, to 555 last week. The problem here with being short is how expensive it is. HYG is paying 7% per annum and the price is rising. The cost to sit short is high, and if you take away the noise around Greece (overdone) and JPM (overdone) the arguments for it to be higher than this are all still in place. Even with Spain, you pay 100 bps running and have a pull to par effect, so you slowly bleed money being short. Add to that, the fear that one of these mash it all together and throw government money (that the government doesn’t have) solutions is enough to get the markets excited and you have the making of a short squeeze. The true “trading float” of Spanish bonds in particular is very small. Most bonds are held in buy and hold accounts at banks and insurance companies. Neither of these groups, overexposed as it is, are buying, but they aren’t selling either, so any improvement in the situation can result in a move disproportionate to the improvement. This is also true, to a lesser extent, in the Italian bond market.
I remain constructive here under the assumption that
- Central banks continue to be extremely dovish and may even take some actions
- Grexit, while likely isn’t imminent and the EU will start trying to sound less arrogant and belligerent towards Greece
- The sell-off in financials, part in Greece, but at least in part due to the whale trade, is over and is reversing as people are able to understand that even at JPM the CIO’s entire book is okay, and that this was not a systematic trade affecting all banks
- Data will continue to be mediocre, but with enough bright spots that the bulls can latch on to something and try and push high
- Sell in May and go away may be a good investment strategy, but selling ahead of a long weekend typically isn’t
Copyright © TF Market Advisors
Tags: Amp, Concessions, Decline, ECB, Excuse, Extreme Volatility, Fears, Fiasco, Government Policy, Greece, Hook, Jpm, Nbsp, Rally, Stresses, Tf, Troika, Whale Trade, Worst Case Scenario, Yesterday Afternoon
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Wednesday, April 18th, 2012
by Russ Koesterich, iShares
While recent market weakness, and the accompanying bond market rally, has tempered fears of an imminent bond market meltdown, many equity investors are still concerned about the potential impact of rising rates on US and global stocks.
This year, I expect long-term rates to rise modestly as they appear too low. Assuming the US economy continues to stabilize over the course of the year, the yield on the 10-year Treasury will likely rise to around the 3% level, roughly where it was last summer.
However, in my opinion, this probable grind higher is not a major threat to US and global stocks this year for two reasons:
Low Starting Point: It’s important to put the current yield environment in context. Excluding the period of unusually high nominal yields in the 1970s and 1980s, the long-term average nominal yield for the 10-year note is still 5.25%, more than twice today’s level. As such, any rise in rates will be coming from historically low levels. And a rise in rates from the absurdly low to the merely low has not, at least historically, hurt stocks. Equity valuations do contract when rates are rising, but this relationship typically breaks down when rates are this low.
The Driver of Rising Rates: In the past, the reason behind why rates rise has been as important for stocks as how much rates rise. Looking forward, the coming rise in rates will likely be driven by higher real rates, not by higher inflation expectations.
When interest rates are rising due to heightened inflation expectations, stock multiples tend to contract. However, when rising interest rates are due to a rise in real, or after-inflation, rates in the context of a strengthening economy, multiples have not been hurt. In fact, over the long term, there hasn’t been a statistically significant relationship between real yields and multiples. If anything, in recent years — which have generally been characterized by too little growth, rather than too much — stock multiples have risen with real rates.
To be sure, none of above suggests that equities have become impervious to higher rates. While higher real yields probably won’t hurt multiples, a high enough rise could dampen earnings. But in my opinion, any rate rise this year should be modest and likely won’t negatively impact valuations. Looking forward, the real threat to stocks in 2012 is weak economic growth, not higher rates.
Copyright © BlackRock, Inc. , iShares
Tags: 10 Year Treasury, 1970s, 1980s, Bond Market, Economy, Equity Investors, Fears, Global Stocks, Inflation Expectations, Inflation Rates, Ishares, Market Meltdown, Market Rally, Market Weakness, Nbsp, Nominal Yield, Relationship, Rising Interest Rates, Russ, Valuations
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Sunday, April 1st, 2012
U.S. Equity Market Radar (April 2, 2012)
The S&P 500 Index rose 0.81 percent this week driven by the healthcare sector, which rallied on the prospect of a Supreme Court decision rejecting the Affordable Care Act.
- Defensive sectors tended to outperform this week, along with healthcare, utilities and consumer staples were among the week’s best performers.
- Within the healthcare sector, managed care stocks were among the best performers with Wellpoint, Coventry Health and Aetna all rising by at least 10 percent.
- Red Hat was the best performer in the S&P 500 this week, rising by more than 15 percent as the company reported better than expected earnings and increased guidance.
- With the likelihood of mergers and acquisitions disappearing for utilities, the sector was the worst performer in the S&P 500 this week.
- The energy sector was also weak as oil fell more than three percent on continued fears of an economic slowdown in China.
- Best Buy was this week’s worst performer on a stock-specific basis as the company announced disappointing results and closure of 50 big box stores.
- The market continues to grind higher on recent news and the “trend is your friend” until this pattern changes.
- The S&P 500 is arguably overbought in the short term and could be vulnerable to profit taking.
Tags: Aetna, Affordable Care, Amp, Best Buy, Care Act, Consumer Staples, Coventry Health, Economic Slowdown, energy sector, Fears, Healthcare Sector, Likelihood, Market Radar, Mergers And Acquisitions, Pattern Changes, Recent News, Red Hat, Sectors, Supreme Court Decision, Wellpoint
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Thursday, January 5th, 2012
The GDP-weighted Composite CFLP PMI that I calculate for China rebounded strongly to 52.6 in December from 49.3 in November. Much of the rebound can be attributed to seasonal factors, though.
While November is normally a weak month from a seasonal point of view the recent extreme weakness is noteworthy and cast serious doubt on the health of the Chinese economy. The strong rebound in December’s seasonally-adjusted Composite PMI (my calculation) to 52.4 from 49.5 in November allayed some of my fears of a possible further deepening of the growth recession in China.
Much of the rebound in the Composite PMI can be attributed to a surge in the CFLP Non-manufacturing PMI to 56.0 from 49.7 in November.
After adjusting for seasonality the CFLP Non-manufacturing PMI jumped to 55.2 from an extremely weak 51.4 in November.
The slump in the seasonally-adjusted non-manufacturing PMI in November was an extension of the weakness that set in since March 2010. The slump in consumer confidence was probably the main driving factor behind the weakness in November.
The strong showing of the non-manufacturing PMI in December may indicate that consumer confidence improved somewhat in December, but with the seasonally-adjusted PMI only at October’s levels consumer confidence is likely to remain at historically low levels. On top of the Eurozone’s malaise, the slump in consumer confidence probably also had an impact on the unseasonal slump in the seasonally-adjusted CFLP Manufacturing PMI in November. That obviously affected Japan’s manufacturing sector too.
Tags: Chinese Economy, Consumer Confidence, Crisis Levels, Eurozone, Extreme Weakness, Fears, Fourth Quarter, GDP, GDP Growth, Inventories, Malaise, Manufacturing Sector, Pmi, Point Of View, Rebound, Recession, Seasonal Factors, Seasonality, Serious Doubt, Slump
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Tuesday, December 20th, 2011
A Look Back at 2011
by Bob Doll, Chief Equity Strategist, Fundamental Equities, Blackrock
December 19, 2011
The Year in Review
Although 2011 started off on a relatively strong note for the global economy and markets, the past year was dominated by fears that contagion from the European debt crisis would derail the recovery. Overall global economic growth struggled in 2011 as most areas of the world experienced growth slowdowns (the notable exception being the United States). Emerging markets were also faced with some mounting inflation pressures, which presented a challenge for policymakers. Although there have been some signs of progress regarding the debt crisis, uncertainty levels remain high and this issue will no doubt remain of paramount importance into 2012.
Given this backdrop, risk assets struggled through 2011 as the year saw a renewed flight-to-quality theme. Equity markets are down for the year in most regions, although US stocks are roughly flat thanks largely to better economic conditions in the United States. Looking ahead, we continue to believe that value can be found in equities, particularly if policymakers can act decisively to manage the ongoing debt crisis.
So with that background, following is a look back at the predictions we made at the beginning of the year. It looks at this point that we’ll get six and a half of our predictions correct, and while that is somewhat below our long-term average of between seven and eight, it is nevertheless a better score than we were expecting a couple of months ago.
- US growth accelerates as US real GDP reaches a new all-time high.
Several months ago it would have been nearly impossible to imagine that this prediction would have come true, but as the year draws to a close it appears that this did, in fact, come to pass. Growth was at a near-zero stall point in the first quarter of the year and accelerated noticeably each subsequent quarter. At this point, it looks as if the fourth quarter of the year will see gross domestic product growth come in at around 3%. Additionally, on a real basis, GDP did reach a new high in the middle of the year.
- The US economy creates 2 million to 3 million jobs in 2011 as unemployment falls to 9%.
This is one we’ll mark as half-correct for the year. Unemployment fell below 9% in November, although jobs growth for the year as a whole was less robust than we anticipated.
- US stocks experience a third year of double-digit percentage returns for the first time in over a decade as corporate earnings reach a new all-time high.
This is another half-correct prediction. Earnings did reach a new high in 2011, but equities obviously did not experience double-digit gains.
- Stocks outperform bonds and cash.
Given where markets are today, it appears we will get this prediction wrong. US stocks are down marginally for the year and have underperformed bonds and cash.
- The US stock market outperforms the MSCI World Index.
This prediction is on track by a wide margin, given that US stocks have, so far, outpaced international stocks by around 10% for the year.
- The US, Germany and Brazil outperform Japan, Spain and China.
Barring some significant changes, this one will come true as well, mainly thanks the strength of the United States relative to the rest of the world. Of the remainder, Brazil performed the worst, but all of the markets outside of the United States were down in the double digits.
- Commodities and emerging market currencies outperform the dollar, euro and yen. This one should be half-correct by year’s end. The average commodity outperformed developed market currencies, but emerging market currencies underperformed.
- Strong balance sheets and free cash flow lead to significant increases in dividends, share buybacks, mergers and acquisitions (M&A) and business reinvestment.
Despite the relatively weak economy, corporations continued to perform well in 2011, which helped promote high levels of dividend growth, share buybacks, business reinvestment and M&A activity.
- Investor flows move from bond funds to equity funds.
This is one we were very wrong on. Given the flight-to-quality trade that dominated 2011, bond funds saw greater inflows than did equities.
- The 2012 presidential campaign sees a plethora of Republican candidates while President Obama continues to move to the center.
This past year saw a number of GOP candidates announce their intention to run and it has been a relatively crowded field. On the other side, President Obama has been taking a more partisan approach in recent months, but for most of 2011 he adopted a relatively centrist stance.
About Bob Doll
Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRock® a premier provider of global investment management, risk management and advisory services. Mr. Doll is also Lead Portfolio Manager of BlackRock’s Large Cap Series Funds. Prior to joining the firm, Mr. Doll was President and Chief Investment Officer at Merrill Lynch Investment Managers.
The information provided does not constitute a solicitation of an offer to buy, or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.
BlackRock, Bank Credit Analyst. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of December 19, 2011, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
BlackRock is a registered trademark of BlackRock, Inc. All other trademarks are the property of their respective owners.
Prepared by BlackRock Investments, LLC, member FINRA.
Copyright © Blackrock, Inc.
Tags: Backdrop, Bob Doll, Contagion, Debt Crisis, Economic Conditions, Emerging Markets, Fears, First Quarter, Fourth Quarter, GDP, Global Economic Growth, Global Economy, Inflation Pressures, No Doubt, Paramount Importance, Policymakers, Real Gdp, Stall Point, Strategist, Year In Review
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Wednesday, October 19th, 2011
Nassim Taleb, author of “The Black Swan” and a New York University professor, discusses the “Occupy Wall Street” protest and his view of the global banking system. He also discusses the need to apply the principles of “Hammurabi’s Code” to the banking system.
Source: Bloomberg, October 18, 2011.
Tags: Banking System, Black Swan, Class Warfare, Fears, Global Banking, Hammurabi S Code, New York University, Protests, Street Protest, Swan, System Source, Wall Street, York University Professor
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Thursday, September 22nd, 2011
This online video features David Sykes, Vice President and Director, TD Asset Management in conversation with MaryAnn Matthews.
The equity markets have sold off sharply after the Federal Reserve offered a gloomy assessment of the US economy and sparked fears of a double dip recession. On this backdrop, David discusses how dividend paying stocks could offer investors the opportunity to “get paid to wait” through this period of market turmoil.
During the interview, Sykes addresses the following topics/concerns:
- What is Operation Twist and why are we seeing a global sell-off?
- What can we expect from US corporate earnings going forward?
- Are US Banks attractive at current levels and which name do you like?
- Will the trend of companies raising dividend remain intact?
- Any other stock that you like?
Click here or image below to view:
Tags: Addresses, Asset Management, Backdrop, Banks, Corporate Earnings, David Sykes, Dividend Paying Stocks, Dividend Stocks, Double Dip Recession, Economy, Fears, Federal Reserve, Gloomy Assessment, Image View, Investors, Market Turmoil, Maryann, Stock, Stocks Online, Vice President
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Friday, September 16th, 2011
The Oakmark manager says the fund is able to pick up quality names at 60% to 70% discounts amid a market that’s selling first and asking questions later.
Here are some highlights:
- I think the biggest worry, and I heard this from one of my friends who is in the hedge fund business in New York, the biggest worry is people don’t want to get caught like they were in 2008 and perhaps ’09. So they are extrapolating what was the situation in 2008 and 2009, and they are selling first and they are asking questions later.
- Despite the fact, what we are seeing in the real economy, despite all these fears, despite all this volatility and market instability in the financial markets, in the real economy we’re not yet seeing what we saw in ’08 or ’09–nothing like it.
- In fact, in August, BMW reported their best August monthly sales ever. And this is after the August we had in the financial markets. So what we are seeing in the financial world is not transferring to the real economy at this stage, and market participants are behaving like the real economy has already adjusted downward 16 notches, when that is not the case. So you have that going on.
- Number two, this volatility I think was caused by … instantaneous information, instantaneous, and people respond and react instantaneously. Now, I think eventually we are going to get to the “boy who cried wolf” syndrome, where people are going to quit instantly responding because they are going to realize that it is erroneous to do so. So maybe this is why BMW sold more cars in August than ever before, because the consumer says, “oh, yeah, that’s the financial markets again.”
- So … as investors, how do we utilize this environment? What can we do with the volatile environment? We try to take advantage of it. As an example, besides the financials that have been destroyed in August and early September, lot of the industrials in Europe. You take a company like Daimler. Daimler going into August–and this is one of the largest producers of trucks and commercial vehicles as well as Mercedes automobiles–was trading at nine times earnings and had a dividend yield of about 5%, payout ratio of about a third. So, plenty of room on the dividend, still yielding 5%. Today, the dividend yield of Daimler is probably closer to 6% or 7%, and its P/E is about 6. That is, the stock dropped over 35% in one month. Now, is Daimler worth 30% or 35% or 40% less today than it was in the middle of July? Our view is no, but the markets are so scared they just wanted out of any European industrial, and you could see it across the board. A company like Akzo, which is Dutch company that makes paints and coatings, same thing.
- So, we try to take advantage of that. Again, our view is the value of the business is not the next couple of quarters of free cash flow and earnings. It’s the next three, five, 10, 15 and into perpetuity, discounted to the present value. That’s what makes the business valuable. Mr. Market, unfortunately or fortunately, fortunately because we like to take advantage of it, is concerned about the next couple of weeks, months, and quarters. However, value is derived from today to perpetuity, and that is where a patient long-term investor could profit.
Tags: Bmw, Boy Who Cried Wolf, Daimler, David Herro, Early September, Fears, Financial Markets, Fund Business, Hedge Fund, Industrials, Market Instability, Market Participants, Morningstar, Notches, Oakmark, Quality Names, S David, Volatile Environment, Volatility, Wolf Syndrome
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