As stocks drop, some investors shop

As markets retreated on global economic worries Thursday, many professional investors spent the day seeking buying opportunities and warning their clients to calm down and stay put despite the turmoil.

These bullish investors think people are selling stocks based on fear, not on fundamentals — a classic signal to swoop in and buy shares of quality companies on the cheap.

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Investors concerned about another recession in the U.S. and the global economy, took part in a massive stock sell-off, sending the the Dow Jones industrial Average down 512 points. The Dow has now given back all of its gains for the year and then some.

Investors concerned about another recession in the U.S. and the global economy, took part in a massive stock sell-off, sending the the Dow Jones industrial Average down 512 points. The Dow has now given back all of its gains for the year and then some.

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“We think this is a buying opportunity,” said Phil Orlando, chief equity strategist of Pittsburgh-based Federated Investors, where he manages the $300 million Federated Asset Allocation Fund. In the past two days, while U.S. stock markets slid more than 4 percent, Orlando has been buying domestic and international stocks.

He said his optimism is based on the relative valuation of the market, or how much it is worth compared with its earnings. As of Thursday’s closing value of 1200, the companies in the Standard & Poor’s 500-stock index were worth about 11.4 times what they expect to earn next year. At the bottom of the market in March 2009, they were trading for 10.9 times their expected earnings, according to Orlando’s calculations.

“We are literally an eyelash away on a valuation basis from where stocks were in the bottom of the cycle two years ago,” he said. That’s why “we’re trying to keep a stiff upper lip here and work with the facts and calm some frayed nerves,” he added.

Birinyi Associates, a money-management and research firm in Connecticut, also spent much of the day calming its clients. Birinyi was one of the first firms to recommend buying when the stock market began to rise in early 2009, and it has stuck to its guns recently, saying in interviews with Bloomberg that the market will continue to rise through 2013.

Even after Thursday, “our view hasn’t changed,” said Robert Leiphart, an analyst at Birinyi. “We’ve been conveying it to our clients all day long as they call.”

Other analysts see reasons for calm in the earnings of blue-chip companies, many of which took a beating in the market Thursday despite their solid performance.

“Second-quarter earnings really came in beautifully. Almost 75 percent of companies beat on revenues and earnings,” said Diane Jaffee, senior portfolio manager at asset manager TCW in New York. “The companies themselves are not indicating this dire scenario.”

As an example, Jaffee pointed to consumer products giant Johnson & Johnson, which she owns in TCW’s Relative Value Large Cap Fund. Johnson & Johnson shares fell nearly 2.5 percent despite its top-notch credit rating and solid earnings performance, though they were up slightly in after-hours trading.

Jaffee also sees a silver lining for consumers, who are getting a break in the cost of mortgages thanks to the markets’ recent slide. The average rate on a 30-year, fixed-rate mortgage is now 4.39 percent, Freddie Mac said Thursday, down from 4.55 a week earlier. The average rate on a 15-year, fixed-rate mortgage fell to 3.54 percent, an all-time low.

Freddie Mac attributed the slide to falling yields on Treasury rates, which act as a benchmark for mortgage rates. As investors fled stocks for the safety of government bonds, yields on 10-year Treasury bonds fell to 2.42 percent, nearly one percentage point below where they started the year.

Consumers may also get a break at the gas pump, as oil futures, which influence the cost of gas, fell 5.8 percent Thursday to $86.63 per barrel. That is close to the price back in February, before it ran up.

 
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