I live on the Hudson River an hour north of New York City. Across the river, every night at 3am, a freight train goes by that is about a mile long. The sound echoes over the water and by the time it reaches me it sounds like the Gates of Hell are opening in my living room. When I wake up from the sound, I begin to worry.

But let me state my credentials. I am a perma-bull. I cannot stand people who are bearish at every opportunity. If an employment report is great they shout “Inflation!” If an employment report is ugly they shout, “Depression!” If you mention gold, they point out that the price of gold and the Dow are going to cross within five years. But for every bearish argument I have a bullish rejoinder.

At three in the morning, however, with the sound of the train reverberating, I stare at the ceiling and worry.

North Korea is launching missiles in defiance of threats of sanctions. The housing market is all set to burst, sending consumer spending into a death spiral. Jobs data were weak but hourly income was up (stagflation worry!) The oil price is at an all-time high. Israel is at war with Hamas. Microsoft has delays. Intel is facing new competition. Wal-Mart’s growth is slowing – all sending large-caps into a standstill or downturn.

Then there are non-stop “revelations” about options backdating. (I put the “revelations” in quotes because option prices have always been disclosed in filings and it just happens to be the crime of the week that people are focusing on.)

The personal savings rate has gone negative for the first time since the Great Depression.

And then there are meaningless factors, such as the second year in an election cycle being weak, or the mysterious “17-year cycle” of bull and bear markets that has found its way into astrological financial literature.

I don’t mean to trivialise this wall of worry. Every one of these things is enough to say: “Let’s pull all our money out of the market.” And that is exactly what has been happening and why we are 5-15 per cent off the highs (more or less depending on the index and country).

But there are a couple of things we do know. First, whether it is 5.5 per cent or 5.75 per cent, at some point the Fed will stop raising interest rates. This will certainly happen within the next six months.

Second, S&P 500 companies are sitting with a ratio of cash to market capitalisation that is higher than ever. What are they doing with this cash? They are buying companies. They are buying back their own stock. They are giving it back to shareholders.

And I have answers to some of the more minor points from the wall of worry. Microsoft Vista and Office have been delayed. This is horrible. For a month or two. Then it will be great. By early 2007, get ready for the next upgrade cycle for PCs. Every enterprise in the world is going to be switching to Vista and they are delaying many purchases in anticipation of this event.

Housing in some parts of the country will certainly go down. But houses are not stocks. While speculative regions such as Florida may have a rough time of it, most people will simply continue to live in their houses and ride it out. And let us not forget that wages are going up, in many states faster than inflation.

The way the government measures the personal savings rate does not count capital gains as income but does count the entire value of a car purchase (even if you put no money down) as an expense. This is one problem among many that renders this number useless. In the Great Depression there was 20 per cent unemployment. Right now there is 4.6 per cent unemployment and rising wages.

And like any balance sheet debt is only one side of the equation. The other side is assets. In 2000, total assets of US households totalled $49,000bn. Right now they are $66,000bn, an increase of 33 per cent. If anything, we should probably do as any activist fund would admonish a company to do – lever up and invest more in ourselves.

So the latest sell-off begins to look like a value buying opportunity. I like Microsoft at these levels in anticipation of Vista. I like Wal-Mart at these levels not only because it is cheap on both an absolute and relative basis (in terms of price over cash flows compared with historical price over cash flows, normalised by growth) but also because of its recent forays into sub-prime banking and cheque-cashing.

I also like betting on the largest “emerging economy” – the internet. Picks include News Corp, with MySpace.com; Yahoo, for reasons mentioned in an article on this page three weeks ago; Real Networks – which I own – which has plenty of cash on the books and because online music is only going to grow. These are just three of the many deep value opportunities in this sector.


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