If you are an investor in any kind of stock these days, it would be very understandable if you were just a bit nervous about the state of your portfolio. Why? Why not is a better question? Since hitting a high this summer, US markets have given back nearly 10% of their value. The long awaited correction, which everyone and their brother called for, has now taken place, or at least started to. The laundry list of issues is pretty extensive: Slowing growth in China, a potential recession and deflation in Europe, ISIS on the march in the middle east, energy and commodity prices falling off a cliff to bolster the deflation argument, and last, but certainly, not least, the potential of an Ebola pandemic in West Africa, and, hopefully not the United States. I hope you aren't ready to pack it in because neither am I, but it certainly is an impressive tally for those who are short.
The most agonizing aspect of the current sell off has been the thrashing in oil and energy related concerns. If you take a look at this price chart of oil, it literally resembles the Wiley Coyote cartoon in a Bugs Bunny cartoon:
Now, keep in mind that in the events of 2008, the price of oil went from $150 a barrel to nearly $20 a barrel. Clearly, the specific asset is by its very nature volatile. With the volatility comes speculation, and those who are on the wrong side of the trade can be placed in very difficult situations. As commodity trading often involves the use of leverage, or borrowed money, many who were ultra long oil may have faced margin calls this week. When you see the kind of panicked selling over the course of the last 5 days that the market did, usually it involves entities which were far too leveraged.
Another area where entities suffered big losses this week was in the merger arbitrage field. When the Abbvie/Shire acquisition was called off by Abbvie on Tuesday, plenty of capital went down the drain as Shire lost nearly 35% of it's value that morning. Rest assured there was plenty of leverage there as well and the selling that morning had 'margin call' written all over it.
On Wednesday, another momentum name got crushed as Netflix Inc (NASDAQ:NFLX) missed revenue and subscriber estimates. The stock has had a massive run, but when you lose 20-25% of your value in a day, that ain't good (trust me, I've been there). Google Inc (NASDAQ:GOOGL) missed as well on Thursday night, but the market has long understood you don't sell Google.
The market finished with a big flourish on Friday, so the week was not as bad as it could have been. Still, the idea investors should be comfortable and the rest of the year is going to be a walk in the park is probably not in the cards. My own opinion is the biggest mistake a long term investor can make now is selling out of positions which are slightly down or they have losses in. Three or five years from now, nobody will remember any of these issues which might be affecting the market. If you own really great assets, stick with them as there is a very good chance you will benefit a great deal by keeping them.
One of the other interesting aspects of the market is that for every loser, there is typically a winner. With energy prices going down, consumers all over the globe are clearly going to benefit. It is always helpful to people to have a few extra shekels in their pockets, and plenty of people can use the spare change. With respect to stocks, you would think anything food, retail, dining, entertainment, or travel related is going to benefit, provided we don't have an Ebola breakout.
As for the energy complex, don't worry about the oil and gas guys, they will be back, and probably sooner than anyone expects. One group which is going to suffer, and probably in a big way, are the lovely bunch of countries which so dramatically depends on oil for the majority of their countries budgets. Look at the following list- Russia, Saudia Arabia, Iran, Iraq, Venezuela, Kuwait, Libya, Nigeria. If lower oil is here to stay, and I strongly doubt it, this bunch is in the house of pain in a massive way. What a shame, don't you feel bad for Vladimir and the boys? You might take a gander at the chart below for a further idea on what they could be in store for.
As for what the future holds, next week brings the meat of the earnings season as heavyweights like Apple Inc (NASDAQ:AAPL), International Business Machines (NYSE:IBM), McDonald's Corporation (NYSE:MCD), Yahoo! Inc (NASDAQ:YHOO), and plenty of others confess all. Fortunes will be won or lost, and nerves will be frayed. You can bet we will be watching, and I assume you will be too.
Finally, it certainly should be mentioned that our heart goes out to the health care workers who have contracted the Ebola virus after treating patients who brought the disease with them from West Africa. Let's hope they can recover from this unfortunate incident.
Disclosure: Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.