Streetwise for Sunday Oct 12, 2008

Streetwise

Lauren Rudd

Sunday, October 12, 2008

Oh, To Be A Soothsayer

“This market is frightening. Do you have any advice?” Oh, to be a soothsayer of such repute so as to know all the answers. Meanwhile, there are countless prognosticators willing to offer up an opinion. They run the gamut from the biased, mundane and often ignorant spin of politicians, to the noncommittal speeches by members of the Federal Reserve. Add in such nonsensical advice as, “sell all your stocks,” and you have a deafening din of ridiculous discourse.

Moreover, all the rhetoric in the world is not going to help your portfolio. What you need is a modicum of cool rationale combined with a measure of forward thinking. Yet, if you are like most Americans you feel that Wall Street has shredded your life, your livelihood and burdened future generations with a crushing debt.

However, to allay a surprisingly common fear, we are not going to experience an economic scenario similar to the Great Depression. That is not to downplay the seriousness of the current economic disruption. It is serious and the Fed has unleashed a number of its weapons, including buying up commercial paper, lending out astronomical amounts of taxpayer money and implementing an emergency half-point reduction in the Fed funds interest rate. That last item made history. The Fed, for the first time ever, coordinated its interest rate cut with rate cuts by central banks around the globe, including the People’s Bank of China.

Unfortunately, economic stimuli are subject to a lag factor. Therefore, do not look for the actions of the Fed and Treasury to begin to gain real traction for several months. At the same time we can hope that the November elections will usher in a reconstitution of the fiduciary responsibility and financial regulation that has been abysmally absent from Washington over the past eight years.

None of which negates the fact that you still have to deal with the current investment environment, especially if you are in your retirement years where you need to utilize your portfolio to supplement your income. Therefore, begin by adopting a stance whereby you ignore the perturbations roiling the financial markets and do not let the decisions and reactions of others drive your investment strategy. Remember, paper losses that result from market aberrations are generally meaningless and short-lived.

Most quality companies are continuing to do business as usual, including retaining a status quo with regard to their dividend policy. Nonetheless, whenever there is a disruption in the financial markets, Wall Street can be depended on to throw the baby out with the bath water.

A good example is Varian Medical Systems (VAR), a company I first discussed here a year ago. Back then the shares were trading at about $42. They recently traded at $48.72, for a gain of 16 percent, despite being downgraded recently, resulting in a price decline from a high of $64 this past Sept.

Therefore, if you had purchased the shares a year ago, you could now sell-off 10 percent of your holdings to use as disposable income, while at the same time continuing to hold an investment in Varian that is 6 percent greater than your initial investment. Furthermore, that increased investment will generate additional compounded growth as Varian’s earnings continue to increase.