Saturday, January 16, 2016

Storm Update

At the end of 2015, I predicted that 2016 would be the “Year of Opportunity” but warned about “Continued Uncertainty”. Then on January 7, I sent an email to clients:

“Markets are in decline for several reasons--most of which have to do with concerns that several prior assumptions appear to be, in fact, myths: 1) The China economy will continue to grow at 5-7% per year; 2) Interest rates will continue to be low forever; 3) The US has eliminated the risk of being attacked by an enemy using a nuclear weapon; and 4) The US Economy can have robust growth while the rest of the world suffers slow growth or recession. All of these prior assumptions were and are "myths"--they are wrong.

Bottom line--a lot of speculators have decided that many of their assumptions were too optimistic if not outright wrong and the market is "re-pricing". This is what I have expected for many months.

Put in perspective--this week is sort of a repeat of August...The DOW is still 800 points higher than the August 25, 2015 low. These "storms" tend to last for 14-20 days, so expect more volatility.

This is not 2008 "all over again". What is happening now is quite different and sort of "normal" for periods when markets correct after becoming too optimistic. Value of your portfolio is NOT determined by daily quotes by the "market". The daily quotes of the "market" are essentially a measure of the emotional and fickle sentiment of a lot of market participants--many of which are not really "investors" but rather speculators who are buying or selling on what they think will happen tomorrow.”

The ”storm” as I predicted, has continued. We are still within that 14-20 day period that storms usually take to wear themselves out. The market is “re-pricing” and is in the beginning stages of creating real long term investment opportunities.

The DOW has fallen a little over 500 points since my January 7 warning and it is STILL above the August 25, 2015 low of 15,666. It is highly probable that the storm will continue until the DOW has fallen below this 15,666 level.

In addition to fears regarding a recession in China and other emerging markets, as well as the probability of rising interest rates, there are three other factors influencing market activity.  First, speculators have finally accepted that there is a real possibility of a “non-establishment” candidate winning the US Presidency. (Trump, Cruz and Sanders scare Hedge Fund Managers and Big Banks because they promise “change”.)  Second, speculators have concluded that falling oil prices are now threatening the stability of large banks who have loaned money that fueled the recent expansion of oil  and commodity exploration and production. (Nothing makes speculators more nervous than bank writeoffs.) Third, the price of oil is now being heavily influenced by speculators who profit by betting on the future price of oil. Just as speculators drove the price above reason on the high side, they are now driving the price below reason on the low side—their activity puts oil companies and banks at risk—a sort of vicious cycle that is nearing it’s end.

To put a bit of perspective on this, even though the price of oil has dropped almost 30% since August 25, 2015, the price of Chevron (CVX) stock has risen 19%.

On Friday, 1/16/2016, there seemed to be a bit of panic in market action. As if “something changed”.  In fact, nothing “factual” has changed.  None of the issues are new. The only thing that has changed is temporarily the “fear of loss” has replaced the “fear of missing out”.

Readers of my postings will recall that I often point out that big market moves often occur on “options expiration” days.  In addition, most investors know that markets often fall on the day just before a long holiday weekend.   BOTH of these factors came into play on Friday.  Options expired and Martin Luther King Day (US markets are closed) is Monday.

Don’t fear market declines any more than you fear bad weather. Both unpleasant, but both are temporary.