"Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong, these are the features which constitute the endless repetition of history."
--Winston Churchill, House of Commons, 12 April 1935
During this period of market volatility and stress, we'd like to share the following discussion of CALAMOS' current views on the market, the economy, and our positioning. The quote above, from one of the 20th century's greatest leaders, serves as a reminder of the perils of trepidation and paralysis.
Over the last few months, CALAMOS commentaries have provided evidence that the economy is on the mend. Are you confident that a recovery will continue?
Yes. It's important to remind ourselves that the major underpinnings for a successful economy are still intact here in the US: private property rights, trust and transparency in the economy, fair taxation, and access to capital all provide a sound foundation for recovery. These essential features combined with the factors enumerated below support our confidence in the economy's ongoing rebound:
- Market Clearing Works: History shows that the U.S. has proven to be very resilient against past market shocks, quickly clearing out the "dead wood" through bankruptcies, mergers, layoffs, etc. These same market clearing functions that have served us well previously are currently alive and well, and have neared completion in many sectors of the economy.
- Competition Makes Capital Spending Necessary: Although businesses have indeed shied away from spending for many quarters, global competition in the form of cheap labor will force U.S. companies to increase capital spending in technology to counter the labor-for-capital tradeoff.
- Access to Capital: Corporate balance sheet restructuring has progressed very well and markets have responded with improved access to capital. While equity capital is a lagging indicator and now only available to the strongest companies, access to debt capital is very good even for the lower rated securities.
- Consumer Debt: Consumers are in reasonable shape, with the majority of their debt placed in mortgages.
- Manufacturing on the Mend: The ISM manufacturing new orders index, closely watched by Wall Street as the sector comprises one-fifth of the economy, bottomed over a year ago and has remained positive since.
- Low Inventories: along with the capital spending rebound, low inventories levels will boost spending, creating jobs and freeing up capital for growth as we restock and rebuild.
Why hasn't growth picked up more?
History has shown that economic recoveries don't trend straight upward and that the markets don't operate in a vacuum, so there will always be factors causing short-term upward and downward movements. The past few months for example, have seen the markets trend downward as war concerns, decreased consumer spending and increasing energy prices overshadow the positive signs of recovery. And while consumer's forward buying encouraged by the last two year's of low/no interest rate programs helped dampen the downside of the recession, consumers are now directing their cash to pay the bills coming due from these programs instead of purchasing new goods. However, consumers are not the sole culprits of the current market lows as last year's corporate scandals led to less aggressive business activity. With corporate officers dubbed as the new villain and operating under a microscope, diminished capital activity by businesses has slowed down growth and the creation of new jobs.
Under the uncertainties of war, short-term market directions are difficult to judge. Our sense is that the war will resolve some of the uncertainties in the market, in that the markets will value action over inaction. The more that investors begin to recognize that threats to our nation are being dealt with, the more prepared the market will be to look past these short-term uncertainties.
Looking past these distractions and focusing on the longer-term indications of economic health, you will see that the economy grew last year near the average long term growth rate. You can recognize this as a signal to position for a market rebound or you can wait on the sidelines until the stock market, a leading indicator of economic health, recognizes the recovery and take the risk of getting left behind.
Some market watchers say the markets are still expensive. Where is CALAMOS finding investment opportunities?
Such observations from commentators are almost always based on the S&P 500 the realm of the largest companies in our marketplace. CALAMOS is finding more opportunities within the mid and small cap arenas, where price multiples are significantly cheaper than the S&P 500 (shown by the chart below).
Source: Russell, 2/28/03
*p/e excludes negative earnings
Are you positioned to take advantage of these opportunities?
We believe that when investors wait on the sidelines for the markets to recognize a recovery; they will have missed out on a large amount of the opportunities. Positioning our portfolios by looking 12 to 18 months ahead helps our customers to be ready for these opportunities.
Across all our strategies, we are adding more aggressive securities to enhance the risk/reward posture. Currently, we are purchasing companies that stand to benefit from increasing business capital spending and those that are achieving more growth potential as a result of their gaining greater access to capital and restructuring their balance sheets. For example, within portfolios that include convertible bonds, we are increasing our use of mandatories which offer greater equity sensitivity than regular convertibles, while we are selling off "cash surrogates" which offer less upside potential. Among equity portfolios, overweightings include internet retail providers, networking equipment, and education firms. Within the high-yield arena, we are boosting exposure to telecom and utilities, but will not pursue distressed debt as part of our increasing aggressiveness.
While we are not allowing the market's concerns to overshadow investment opportunities, we are adhering to our investment philosophy and remaining invested for the long-term as history has proven that no market timers have ever been successful for more than a short period of time. Our experience tells us that in periods of high emotion and fear, it is even more imperative to remain focused, fully invested, and prepared for market recoveries. We believe we are in just such a time now.