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What would a contrarian say?

If you’re going through Hell, keep going…

Winston Churchill said these words, presumably during a crisis much greater than the one we are in currently. At the moment our team takes solace in these words, and we are constantly on the search for ways to recover some of our drawdowns. Any aberration in normalcy presents opportunities, lurking in a far corner. As we had our flashlights on full beam over the last few days looking for the seemingly elusive opportunities, we stumbled upon some interesting facts:

- The US equity markets look to be at their cheapest trading below 13x earnings. That translates into a healthy earnings yield, which, while compared to US treasuries this looks expensive, we know that the Greek Drama and Operation Twist have these yields at artificial lows.

- Cross sectional volatility of monthly returns in the US markets is the highest since the beginning of the year. The number of stocks in the S&P 500 with positive monthly returns has dwindled from 317 in January to 61 in September. Even August – when the United States of America (not Greece) was flirting with bankruptcy – saw more stocks with positive returns. 60% more, to be specific.

Yes, growth prospects look dimmer than at the beginning of the year but corporate America is not ailing by any reasonable measure. The spectacle of fear is guiding the markets. Good news is dismissed instantaneously, and bad news is sacrosanct. How long will this last? Another 7 weeks? Perhaps, but the probability may be lower than what the broader market thinks.