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07/21/2017

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Financial Fitness & Life Planning

Anticipating a Return to Volatility

The stock market calmly moved higher throughout the month, as early October seemed to become a distant memory.  Beneath the surface, however, there exists a large degree of internal dispersion while credit spreads have been widening – suggesting greater risk-aversion that could foreshadow a return to volatility.  Indeed the final trading day of November saw just that as the plunging price of oil caused a major sell-off in the energy sector, a meaningful decline in the small-cap Russell 2000 index and a flight to the safety of treasuries (all while the major indexes disguised the tumult, barely moving at all).

Regarding the significant happenings in the oil patch, obviously the industry landscape has changed.  The combination of global economic weakness and dramatically increased supply from the United States has been causing the price of oil to decline for months.  When OPEC decided not to cut production, a panic ensued.  Short-term these events hinder profitability for almost all energy companies.  Longer-term, however, the largest, best-managed and most well-capitalized companies tend to benefit from situations such as this via market share gains and consolidation while marginal players with heavy debt loads go bankrupt.  For instance, Wells Fargo and JPMorgan Chase are stronger relative to their competitors today than they were before the financial crisis, precisely because of the financial crisis. 

More broadly I continue to retain a limited market exposure due to a lack of available value opportunities.  I do not require a repeat of the 2000-2002 and 2007-2009 market disasters in order to become significantly more invested.  A less-dramatic 10-20% drop would likely bring my fund somewhat close to fully invested.  Regardless, I will continue to pursue my strategy of only buying gems – high quality stocks at bargain prices such as Apple in April 2013, Berkshire Hathaway below its publicly-stated stock-buyback limit price and my fund’s bank purchases less than two months ago that have already delivered at least a years’ worth of returns.

~~Michael Berlin can be contacted at mberlin@mhbpartners.com and at (631) 629-4928 .

The information included in this article is not intended to be used as a basis for making investment decisions nor should it be constructed as a recommendation to buy or sell any specific security. Consult your investment professional for additional information and guidance.

Today is: October 17, 2017 - 4:07am
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