It's tough not getting depressed....

The more I read the newspaper, the more convincing the headlines seem. There are very disturbing macroeconomic signs in every country in the globe, even our own supposedly steadfast one (Canada). Unemployment rates are rising, net worth is dropping, people are walking away from their homes and there is no light at the end of the tunnel. Some very erudite essays in the Economist and those insightful pieces written by Vitaliy Katnelson paint a gloomy picture for China, India and Russia's outlook in contrast to their recent stellar view .

No place to run. No place to hide. Cheap energy and a devalued loonie is suddenly our enemy when only a year ago the opposite was true.

Believe it or not, there is another way to view the market's prospects. It's my personal belief that there's a 90% chance that the US will lead the world out of this mess just as they lead us into it the first place. I sure don't know when, though.

Consider these points, made by the Southwestern Asset Management group in a recent conference call:

• "The earnings yield of the S&P 500 relative to Treasurys has made equities the most compelling since the mid 1930s.
• "The annual 10 year return for large company stocks has turned negative – something that has occurred only two other times, in 1938 and 1939, since tracking began in 1926.
• " The VIX, an index measuring expected volatility and therefore fear, hit an all-time high in November.
• "Significant margin calls and capital calls from various types of private funds have caused widespread selling of equities.
• "Advisor sentiment measuring bulls versus bears has fallen to the lowest level in over two decades.
• "The amount of cash being held on the sidelines by individuals has grown to a sum significantly greater than the total market cap of U.S. stocks.
• "Investors have bought Treasurys with no return, an indicator of the fear of other investments.
• "Institutional managers have held high cash balances in spite of acknowledging equities’ undervaluation.
• "Warren Buffett and Prem Watsa, two of the best fundamental investors, have made significant moves into equities.
• "Insider buying at companies has been rampant."

I think the last point is debatable. In late 2007, insider buying was much higher than it is now, particularly in my holdings. The rest have merit.

The bottom line is that I agree with the bears that more pain is probably due. These problems will work themselves out over a number of years. The thing is that the stock market is forward looking (usually 6-9 months or so) and when the first sparkle of light shows through the darkness it's not unreasonable to expect a violent ramp UP from pent up demand to invest the money on the sidelines. T-bill's are in negative territory and bank accounts don't look very appealing.

Over the next 6 months I plan to find a number of small to mid cap companies with excellent management, very solid balance sheets and liquidity and preferably with a decent dividend and sock my money away there. Stay tuned.

l