Oil, Slowing Globe Lead Markets Down!

When faced with a challenge, look for a way, not a way out. David Weatherford 

 

When George Bush, to be clear- the son, was serving the country as President, his Secretary of Defense was Donald Rumsfeld, a long time war horse of many previous Republican Administrations. His most famous quote, when asked a question about a potential situation, was as follows, “Reports that say that something hasn't happened are always interesting to me, because as we know, there are knownknowns; there are things we know we know. We also know there are knownunknowns; that is to say we know there are some things we do not know.” Well, gee, that clarifies it, right? I bring this up because of what has transpired in the equity markets over the past few months, which is, stocks have been pummeled. Let’s be clear, it hasn’t been just stocks, either. The price of oil has fallen 30% over a month and a half time frame (end of September until third week of November). If there was ever evidence of the compression of time frames in global markets with respect to price discovery, that would be prima facie exhibit one. Viewed singularly, the loss of value in US markets in the last few months has been especially difficult for the most highly weighted companies in the indexes, mostly technology enterprises. However, if one looks across the globe, the pain is sharp and deep nearly everywhere. In fact, the US has held up better than most regions as China is down 20 percent, Japan nearly ten, ditto for Europe, and Australia, Canada and Mexico are all down at least five percent as well. So, let’s go back to Dapper Don and try and put a few thoughts together, shall we?

Given the global pain, when markets experience the waves of selling we have seen, usually there are specific situations that are causing the stress. It can be in a country, like the Mexican debt situation, or a specific entity, think Long Term Capital Management, Lehman, AIG, etc. What is important to remember is with the digital age, every market is interconnected. If there is pain in China, where some entity is leveraged and facing capital calls, it can have immediate ramifications in the United States. All over the globe investors have lost money. People don’t like watching the value of their capital go down, so they say, “Sorry Mr. Hedge Fund, or Mr. Portfolio Manager, I know you are a good guy, but the year is ending, the restrictions on what I can do are over, and I want my money back.” Now, many hedge funds and bigger named entities have lockups that tie investors up, but many do not. My point is we don’t know how many entities are leveraged and where and to what asset class and what they owe and when do they owe it. What we do know is oil is down 30 percent in a month and the same is true of some very large stocks as well. Those losses can lead to other actions, like, selling, in nearly every stock, commodity, or currency. Now, with essentially one month left in the year, plenty of money management firms across the globe start looking at closing the year by either protecting gains or selling losers for tax reasons. All of this is dependent on what a client is trying to accomplish as well, and if a client wants out, well, they want out. What this means is if you are a long term investor, there is a good chance you now have your pick of entities you might have wanted to own for a long time. You take your time, you compile your list, you focus on what exactly you want and why, and when the time is right, you take your shot. We know that Mr. Buffett has been buying millons of shares of financial firms, mainly large money center banks, as well as Apple. You don’t have to own those, unless you want to, but it illustrates that while somewhat opaque, Mr. Rumsfeld’s quote potentially has some practical benefits. In our case, it is to sift through the wreckage and find stocks which will be rewarding for years or decades to come. Most often, it will be something we already own. We will only be able to evaluate the results in two or three years, so there probably won’t be any immediate gratification, but that is what makes investing such an intriguing activity.

In looking ahead to next week and beyond, Fed Reserve Chairman Jay Powell will make a speech where investors are going to try and figure out whether or not Mr. Powell will continue on the course of raising interest rates three more times in 2019, or will take a pause to see if the globe might react better to a slower, lest severe path. President Trump and Chinese President Xi Jinping will meet in Argentina at the G20 summit to talk about a wide range of things, including global trade. There are quite a few investor conferences and specific company investment days which will make news as well. As Mr. Rumsfeld says, these are known knowns. We may learn of more knowns that were previously unknowns but knowns by those in the know. At this point, it is time to say enough, and hope you had a Happy Thanksgiving and enjoyed your time with friends and family. 

Thank you for reading the blog this week, and if you have any questions about investing, please email me at [email protected].
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog,  Investing in securities involves risk and the potential loss of ones principal.  Past performance is no guarantee of future results.  All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation.  The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.