It’s been a slower week for data but one thing did strike us as interesting over the past few days -- stocks reacting positively to presumably bad news as we saw with retailers Home Depot and Lowe’s. Both stocks reported weak earnings relative to expectations and guided lower for 2008 but both saw their stocks move higher. These are the types of events we look for to suggest stocks or industries have been washed out and that longer term investors are beginning to look beyond the current weakness to future improvements in fundamentals. The semiconductor industry is notorious for these types of moves at cyclical bottoms.
However, we continue to feel that this economic recovery will be more gradual and less V-shaped suggesting it will take time before any real improvement in earnings results is visible for many industries including homebuilders. This leads us to believe the move in these particular stocks are likely head-fakes driven more by short-covering and an overall lack of liquidity than real institutional buying at this point.
We agree that the markets are nearing if not already at bottoms and do believe some areas represent great values. That said, we’d be buyers on weakness rather than strength given how long it will likely take for fundamentals to improve and longer-term catalysts to reappear providing value beyond cheap multiples alone.