Energy: Update

While Riley Wealth Management, LLC no longer has a custodial affiliation with Raymond James I have maintained a relationship with their energy research department and regularly read their industry updates.

Recently Raymond James Energy lowered their price targets on a few companies to incorporate a slightly higher risk premium given the depressed oil price environment. Specifically, they lowered their price targets on Legacy Reserves (from $32 to $28).

Several fundamental oil drivers have deteriorated over the past couple of months including: increased production from Libya and Nigeria, lower global oil demand growth assumptions and Saudi Arabia’s apparent willingness to allow global oil prices below $90 per barrel. In English that means their longer-term oil price outlook is modestly worse than before.

If you have any questions about how the price of oil may affect positions in your account please don’t hesitate to call.

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Easy Money Is Over

Over the last four weeks we have been reminded that volatility and corrections still exist. Back in 2009, you could buy anything and it would make money, but now the rules have changed.  The bull market is not over; in fact with this pullback, valuations now are very attractive. Everyone loves volatility when the market goes up but when it goes down fear looms its ugly head. Ebola, ISLE, and oil going down cause some unfounded selling. In fact, I had one client on Wednesday go to cash even though he was only down 2% with the market touching 8%. That was my first indication a bottom was forming.

I have written several times in the past that corrections are part of investing and this most recent was normal very orderly. However, after 40 years of investing I realize that there are people that just don’t belong investing in equities. In the back of my book I have my catch 22 list. The first question is “Do you understand how markets work”. Obviously, even with all my coaching; that client didn’t.

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Isn’t Halloween on the 31st?

October 15 was quite a scary day for Wall Street with the index opened lower and plunged to its -3.04% in the early afternoon. The deepest intraday low since the -3.86% since the nosedive in November 2011. A buy the dip strategy subsequently kicked in with the index closed with a greatly trimmed -0.81% decline.

I hate to blame this on external factors but animal spirits rose with the Ebola scare exacerbating the fear. Economic and earnings reports are positive, in fact on the jobs reports unemployment claims came in with the lowest number since 2000.

You have heard me use the “history may not repeat itself but it sure can rhyme” saying many times, so looking back at march 2009 the S&P was down -7.40.  All of you should know what happened since then. If you don’t then you need to call me and I will give you a quick review.

Corrections happen but discipline investing will always overcome and profit from them. There are a lot of things to buy now and these events like Ebola will become old news very soon. I have never made money buying at the high but buying at the low has worked pretty well.

Bill

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A quick look at this volatile week

Over the last two weeks the market decided to catch up; from no volatility to an unusual amount of volatility. Historically, it is not unusual to see this in September and October. However, we are just 3.5% off the all-time high of the S&P.  This is not a correction; that would take a 7 to 10 % drawdown. The fears that are bothering investors really have no basis. In fact, there are a lot more positives than negatives in the underling economy.

With a three day weekend coming up maybe this will give investors a chance to reevaluate their positions and redeploy cash into what is now a much oversold market. I will be sending out a more in-depth explanation of the current fate of the market Tuesday. With the 10 year note at 2.3% why would you want to not stay in stocks?

Bill

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A Mini Correction

The consolidation (which was expected) seems to be ending as I write this on Thursday afternoon. The minor pullback will be discussed as the week plays out. I even had a prospect call and see if we were getting out of the market because of the Ebola scare. All I know is stocks just got cheaper.

Historically, the fourth quarter has been very favorable for equities. In fact the S&P 500 has made more than half of the index gains over the past 25 years during the final three months of the year. Since 1989 the S&P is up 612% with 52% coming from the fourth quarter with the third quarter being the worst.

So here are three things that might make this a winning quarter:

  1. Sell in May goes the other way
  2. The Presidential Cycle
  3. The Santa Claus Rally

The S&P just extended is winning streak to seven straight quarters, and it’s reasonable to wonder just how long it can continue. Some investors are also worried that the Federal Reserve’s winding down its economic stimulus, or QE.

History is on our side and this pullback was needed.

Bill

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September Lessons

It is very easy for investors to become complacent with the returns experienced over the last twelve months. As we close out September we come back to the reality that volatility still exist and markets will fluctuate. Last week was an excellent example with 200 points swings in the Dow over a period of 48 hours. Many investors were asking last Thursday if this was the big correction. By Friday morning the tide and turned and the “never mind” seemed to be the conversation of the day.

So what did we learn? Volatility is not a bad thing and can present excellent buying opportunities. That a 200 point decline in percentage points is only about 2%; hardly a doom and gloom event. Timing a market is impossible. Just think how you would feel last Friday afternoon if you would have sold out on Thursday.

We are now entering the strongest part of the seasonality of markets. Remember the old saying of sell in May and buy after Labor Day? Also, we have the midterm elections and beginning of 18 months of political focus which has been historically positive for the markets. Therefore, this minor selloff is actually a positive if history is to be believed.

Bill

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Mid-Year Update

Can you believe that six months of 2014 has passed? Television journalists have been busy keeping us informed of new all time’s highs and have hosted a continual parade of the bears predicating the big correction. The problem is that when the reality is good; the only way to get our attention is to say something different even if there is very little proven analysis to back up their doomy predictions.

 I use the following market conditions to remain levelheaded among all the noise. The first and the most important is valuation. Valuation is very tough to gauge in this environment. In the 1990s when stocks gave us about the same returns as they have this year you could buy treasuries to offset, but that does not exist today. Stocks are priced to have low returns but treasuries are priced to have no returns.

At the present there are various P/E models that attempt to give us what the valuation of the markets currently exhibit. My caveat with valuation is that holding a lot of cash based upon valuations alone can dramatically affect your performance. This is an example of market timing which I have yet to find any proven process for success.

The subject of monetary conditions for predicting the market is very difficult when the effective rates are zero. Historically, as rates go down stocks go up but it is hard to find in the last thirty years conditions where rates have stayed this low for this long.

The sentiment of individual investor is extremely perplexing. I have never seen a very health bull market so underappreciated as this one. However, sentiment is improving which suggest that the point of maximum optimism for this bull market occurred in January of this year and that correction risk is elevated. The point of maximum optimism doesn’t mean a bear market is looming, but it suggests that we are in the later stages of the bull market.

This bull market isn’t over, but the risk of notable corrections elevated. This does not mean we are going to crash but locking is some profits on extended positions is prudent and remain patient for the next opportunity. Since of process of rebalancing is a major point of our models we practice the profit taking is automatic.

Thanks

Bill

 

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