January 2016 VSG Portfolio And Market Update

January has come and gone this year and the investors have been left behind in a sea of red.

For believers in January Effect, this can be foreboding. They say that the month of January is a barometer for how the stock market will perform through the year. This is not really true, but as an investor you do wonder what may be coming.

There are a few main areas of concern for the investors:

1. Volatility: It is becoming very clear that investors are leaving certain names and asset types in droves. Junk bonds have been decimated, so have been the stocks of energy and commodities companies. Biotech, most tech stocks, financials, you name it, have all suffered. When this happens in smaller stocks that do not have enough liquidity in the market, the prices can reach ridiculous levels. Heck, superb buying opportunities are opening up even in preferred stock which tend to be less risky than common. Important to have cash on hand to take advantage of these.

2. China: They think China is slowing down. It is NOT slowing down. So the growth is no longer going to be 7.5% but rather 6%. But it is still growth. The China problem is mostly an inventory problem. China overbought a lot of raw material and commodities based on their earlier growth estimates. Now that the growth is slowing, things have piled up. So China doesn’t need to buy a lot of the stuff they need until the excess inventory of what they already have is used up. Eventually supply and demand balance, this has always been true and will always be true (unless there are irrational actors on the stage, which there can’t be in the long run).

3. Commodities: See China above for the demand side of the equation. On the supply side, you might have noticed the big 3 Vale, Rio Tinto and BHP Billiton raise production in the face of  declining prices and a supply glut. There is a very good strategic reason for this. This kills off less cost efficient competitors faster and will make the recovery in the commodities cycle come faster than it normally would if left unattended. The big 3 will then be even bigger 3 as they would have grown their market share.  But yeah, investors look at the short term impact on these companies and punish their stock. Long term investors should welcome the widespread short termism in the market as that is what makes these once in a lifetime valuations possible.

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Disclosure: None.

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