We remain hopeful about equities in 2015, but remind readers that the linearity of the market's upside trajectory in recent months was susceptible to a similar linear (straight line) downside response, as occurred last week. In fact, all the way up the ladder of capital gains during the past two years we had been exceedingly careful about jumping in with the herd mentality because relative strength integers were bumping up against and testing the boundaries of probabilities and potential. Sure enough, the wave of panic which overtook the markets last week was one part fundamental excess, two parts psychological panic.
Discipline
(the investment kind) can help to make sense out of these issues that are both
complex and simple at the same time.
Obviously, the "simple" answer to our most recent avalanche is
that sellers (profit takers, traders, and the anxious) became overwhelmed by
the decline in energy and commodity prices, and the ubiquitous news coverage,
and decided to cash in temporarily from the mini-boom that had been so good to
them for months. With indices
approaching "saturation levels", technical deterioration was
inevitable. Thus, more sellers than
buyers.
But
as you know, that answer is far too simplistic when trying to weave together a combination
of fundamental, technical, and psychological components that make up the
markets. Even if only one of those
elements "caused" the panic selling, the accompanying constituent
factors would be too diverse to be causal, alone. What
we know, now, is that earnings need to be revised downwards, and that sectors
like banking, energy, and industrials might fall victim to a global slowdown in
demand, if not uncertainty which seems to pervade the collective mindset of
most traders. Restricting our analytical
focus to energy alone is not the answer, either. We inhabit a complex "blue marble",
and we need to be stewards of all things, big and small, to ensure that our planet's
journey is bountiful for everyone.
Energy,
food, and water
Besides,
the energy price decline did not appear out of thin air, nor did it just
materialize in the past week. Indeed,
the seeds of commodity price reversions had been gestating for several
years. As the global economy built
traction while it climbed out of this generation's Great Recession, increasing
demand for fuel and metals led to a rapid buildup in excess supply. The integration of world financial markets,
along with a globalization of commerce, produced the largest surplus of raw
materials in a generation, trying to stay ahead of Western and emerging
markets' demand for wood, metals and oil.
Producing nations competed ruthlessly for market share and market
dominance. Prices surged, and the
advantage shifted to the owners of the commodities.
Thus,
the price crisis today is born out of an insatiable appetite for fuel and
materials that became overblown, and vulnerable to cyclical events and world
politics. Replacement reserves are so much more
efficient today because of technology and the advent of alternative solutions. In fact, alternative science such as wind,
hydro, solar and geothermal now presents us with a unique, and historical,
opportunity to create profits from sustainable and replenishing sources. The same creative science should be applied
to mankind's other pressing needs, including food and water. Remember, the planet's resources are
finite. How we deploy them speaks
volumes about who we are and in what condition we chose to leave this globe to
our heirs. The public has lost its
appetite for oligarchs and current events to rule our access to life-sustaining
supplies.
Under
the current scenario, any scientists, engineers, industrialists, or capital
sources that can figure out how to provide a dependable flow of social,
economic, and moral resources, gains the upper hand in building political good
will as well as financial profit for their stakeholders.
The
horrific experience of the past few trading sessions nearly has eviscerated all
the hope gained during the market's previous two year rally, and is a major
reason we need to keep our head about us while ignoring a 24 hour news cycle
and the pundits that offer quick fix answers to long-term portfolio management
problems. It's true that we have an
earnings problem in the markets: the expansion of prices in the stock market is
simply not able to support what is likely to be a reduction in the acceleration
rate of earnings going forward. That
having been said, I believe, in fact, that there is an ever
widening corridor of opportunity in the equities markets, if we can just manage
to navigate through the volatility and flotsam that causes near-term
psychological distress. Focus your resources
on early stage research in biopharmaceutical sciences, agricultural
breakthroughs, infrastructure development, and innovations in technology. It requires a bit of work and study, yes, but
that's why I'm here to do the heavy lifting.
The
relevant numbers are found in the trendlines and the relative strength
integers. The former are improving; the
latter are overbought.
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