The 2nd quarter ended with a thud as the outcome of the BREXIT vote surprised nearly everyone. Global markets responded predictably with a sudden, sharp sell-off. As the dust settled and the facts became clear, most markets rebounded. At this moment major equity indices have returned to pre-BREXIT levels and in a few cases reached new records.
A brief review of the selloff by major market index (May through July 2016):
Dow Jones Industrial Index
S&P 500 Index
Euro Stoxx Index
FTSE Index (London)
Nikkei Index (Tokyo)
This situation illustrates the folly of markets. Emotion and misinformation frequently drive prices lower or higher in the short-term, only to reset to rational levels post-facto.
Central bankers reacted predictably to the BREXIT, providing increased liquidity. As a result, the US 10 year treasury bond touched its lowest level in history (1.36%), while the German 10 year bond actually traded to a negative .20% (an investor purchasing a 10 year German bond will actually be charged to hold the bond).
US Treasury 10 Year Bond (yield)
Time and time again scenarios such as this occur; an event or speculation of an event causes market participants to furiously buy or sell (stocks, bonds, mutual funds, ETFs or other liquid financial assets) creating significant price distortions. At some future time, evidence based analysis indicates the error of the masses and prices again revert to more rational levels.
Price variability such as this can be described as a ‘discrepancy between price and value.’ This is when an asset’s price fluctuates widely from the underlying asset’s worth or appraised value. There is an extraordinary investment opportunity to be realized when this occurs. Excessive price variability creates distortions between price and value which can be exploited with buy and sell orders. There are no rules governing price rationality.
The following common stock chart illustrates its share price fluctuation above and below appraisal:
The BREXIT news was the equivalent of a 7.0 on the Richter scale, reverberating across the globe, impacting equity, debt, foreign exchange and commodity prices. Lesser “tremors” occur far more frequently and often go unnoticed. Recent noticeable headline events including “Chinese Economic Collapse”, “Oil Heading to $10/Barrel”, and “US to Default on National Debt” are but a few of the more memorable catalysts to sharp market selloffs.
Every tremor creates potential opportunity, some greater than others, but opportunity nonetheless. The firm’s research division, Global Value Research Company (GVRC), spends its time analyzing when and why assets are mispriced and then determines if an opportunity exists. Our analysts are careful to recommend investing only when they believe the opportunity is clear and large. Markets continually have periods of pricing inefficiencies.
In late 2015, as a consequence of a series of missteps by a legendary NY based investor, a large opportunity presented itself for bond investors. GVRC took full advantage and recommended adding a considerable amount of capital to bond portfolios over the first few months of 2016.
During the first quarter of the year, as energy prices continued their relentless decline, a number of financially strong energy related companies began trading at unreasonably discounted prices (along with other lesser companies that arguably deserved to trade lower). The so called baby and bathwater were tossed. Again, a distortion between price and value occurred and we took advantage.
Global Value Investment Corp. is nearly ten years old. The firm’s principal has been on Wall St. close to 30 years. As long as he can remember there have been disruptive events creating discrepancies between price and value. We suspect this will continue and likely become more exaggerated as information continues to flow more freely and quickly to an increasing number of investors around the globe. We look forward to more of these days ahead. Opportunity awaits the prepared.
As always, feel free to call or e-mail if you have any questions with regard to our letter or other related issues. Please let us know of any change in your circumstances that we should consider when evaluating your portfolio and financial needs.
A mid-year update from the heartland:
Our investment research team added Prakash Goath to our India team. Prakash joins us from Fact Set Research Systems, where he performed analytical investment work.
The firm recently adopted an employee stock ownership plan allowing all tenured full-time US based employees to own stock.
Tom Molosky has agreed to take over firm-wide compliance duties. He will assume the Chief Compliance Office (CCO) responsibilities and title in 2017.
Sam Schaefer was promoted to Vice-President Investment Research and has taken on additional portfolio management responsibilities.
Our institutional client division, Milwaukee Institutional Asset Management (MIAM), continues to expand, having added several new clients this year. The firm’s institutional clients retain MIAM as an investment sub-advisor. MIAM now offers service to professional investment advisors and firms across the United States.
As Global Value Investment Corp. continues to grow we want to thank our clients for their ongoing trust and confidence. We continue to dedicate ourselves to excellence in Investment Research & Advisory.
Very best wishes,
Your Investment Research & Advisory Team
Global Value Investment Corp.
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The opinions expressed herein are those of Global Value Investment Corp. (GVIC). The data is furnished for informational purposes only and should not be relied upon as the basis for an investment decision. Although it is derived from sources believed to be accurate, GVIC cannot guarantee the accuracy of statistical information.