Where Are Wall Street’s Value Investors?

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Justin Lane / EPA

Are value buyers waiting on stocks to fall even further?

Updated: 3:40 p.m.

Notwithstanding the modest bounce-back on Tuesday morning, Monday’s precipitous stock market decline probably won’t be the last of the ongoing meltdown, Wall Street seems to be saying.

One big reason for that sentiment was Monday’s trading volume: 9,713,476,005 shares  changed hands during the session, the most in a day all year. And high volume generally means that the current trend — massive selling, in this case — will continue.

Another informal indicator? The rhetoric that traders — never a reticent group — were using to describe the market seemed to likely to trigger even more anxiety among investors on Tuesday. In an hour’s worth of news reports and conversations with money managers and traders, I heard explosion of volatility, haywire, emotional, financial massacre, risky environment, and uncharted territory.

(MORE: What Washington Can — and Won’t — Do About Market Fears)

Irony of ironies, scared investors are pouring cash into U.S. government debt – the very target of the Friday’s S&P downgrade. But that’s the point, Wall Street money managers say: The beating the market absorbed today isn’t really about the downgrade. It goes much deeper than that.

“What’s rocking the market is a growth scare,” noted Kathleen Gaffney, co-manager of the $20 billion Loomis Sayles bond fund, to the Associated Press on Monday. “The market is under a lot of stress that really has little to do with the downgrade.”

But traders and analysts are scratching their heads over another ominous market mystery: Where are the bargain hunters?

Bargain hunters, more formally known as value investors, look for good stocks at cheap prices — and sometimes okay stocks at really cheap prices. Legendary investor and value guru Warren Buffet calls such investments “cigar butt” stocks. They may have been smoked, but there are still a few good puffs left in them, according to the Buffet Doctrine.

But cigar butt investors were nowhere to be found on Monday – the type of trading day that usually brings bargain hunters out in droves. Nobody really knows for sure why value players are being so quiet.

Noted gold advocate Peter Schiff, founder of the Westport, Conn.-based Euro Pacific Capital, is no fan of U.S. economic policy, and is on record as saying that the U.S. economy is going back into recession.

But that said, even Schiff noted that the steep drop in stock prices — especially commodities — might intrigue investors.

“Gold will go up no matter what,” said Schiff on CNBC’s Fast Money Monday afternoon: “(But) we are probably in a recession and it is going to get a lot worse and people don’t know that. Within that there is a lot of opportunity.” Schiff says that investors may specifically buy the drop in commodity stocks — especially gold stocks.

Others point to continued stronger corporate growth, and an earnings environment where 70% of S&P 500 firms beat second quarter earnings estimates. 

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“The U.S. is the best house in a bad neighborhood,” insists Brian Belski, investment strategist at Oppenheimer, in comments to TheStreet.com on Monday. “A few paint chips coming off the house do not mean the house is falling down.”

But the current mindset seems to be akin to buyers in the U.S.  housing market over the past few years. “Sure, prices are low,” investors seem to be saying, “but my gut tells me they’re going to go lower.”

The DividendsForLife blog perhaps best described the current sentiment among value-oriented investors. The blog, written anonymously by a former financial analyst, says that while bargain plays may be tempting, it’s still not time to get back into the water yet

After spending a significant amount of time studying the problem, I am convinced the current financial situation should concern us all. No, I am not talking about the recent drops in the stock market.
In normal times stock market declines would excite me and I would hope for another 5-10% drop. I love to buy quality dividend growth stocks when they go on sale. A lower price means a higher yield and more dollars in my pocket.

Yet DividendsForLife isn’t pulling the trigger – at least not with so many “puzzling” outliers rearing their heads. With larger economic issues at play, notably continued low interest rates, weak consumer demand, and wildly chaotic commodity prices, the stock market’s problems go way past debt downgrades and one day of trading, the blog argues.

That’s the message value investors are sending to Wall Street, and to average investors – that no bargain is worth the risk of getting scalded by further declines. And when Wall Street’s bargain hunters are taking a pass, you know the markets are in trouble.

Updated: Comments made by Euro Pacific’s Peter Schiff were updated to provide fuller context on his thoughts regarding the steep drop in stock prices.