In any market, and it does not matter what it is as long as it involves capital, the calculation between risk and reward is always the heart of the matter. It could be stocks, could be bonds, currencies, real estate, private equity, hedge funds, options, swaps, forwards, futures, guaranteed insurance contract, mutual funds, and, of course, without question, it might involve events of chance, like maybe poker or horse racing betting. The difference in the latter is those are frequently zero sum games. Now, I highlight the latter because no matter what the situation is involving capital allocation, the goal is to transfer the odds of reward to risk in your favor, and do it in as an extreme a way as possible. Symmetry is to have balance between things, well, we want asymmetry, with reward stacked in our favor. You get my drift, eh?
Anyway, the great majority of people in finance believe that risk follows the above definition, meaning to risk loss. In any market, the market price of your asset dictates whether you have a loss. However, the key point is this is only on paper, meaning it is unrealized. If you actually sell and take the loss, that is a realized loss. When you invest capital in financial assets, unless you are willing to hedge market risk, you have to learn how to handle unrealized losses. My approach is they can matter, but you should be far more concerned with financial and business risk specific to the assets you own. Ultimately, over the course of a long period of time, the latter two risks are going to have a dramatic impact on the price of the financial assets you own. It is in this light we have to to turn our attention to the market this week.
Unless you were paying attention to other things, it probably did not escape you that financial markets were down again this week pretty hard, losing over 3%. There can be any number of reasons for it. The August jobs report came in a bit light at 173k, below the 225k expected number. Unemployment ticked down to 5.1%, and it appears the odds are 50/50 that Mrs. Yellen and the FOMC will raise interest rates in a few weeks. Consistent with central banking policy all over the globe, Mario Monti declared the ECB is prepared for additional stimulus measures in the event the European economy needs more help. Oil and commodity prices continued their descent on the idea emerging markets and China ain't getting any better any time soon. Global growth seems like a distant mirage for many investors, so the U.S. is the best looking guy in a family full of bow wows, no offense to canine lovers. Still, after a tough summer with markets repeatedly pummeled over the last month, the gloom is palpable. In fact, you can see it in market data as there are seven companies at yearly lows for every one at a yearly high. Trading on Friday revealed nearly 8 losers for every one stock in the green. A key point is trading volume is pretty thin, so when the major leaguers come back on Tuesday, well, we start a whole new ball game.
Circling back to the central theme, as an investor I am always trying to find situations where if my analysis is correct, the reward is potentially dramatic versus the price paid. When markets sell off and you get cheaper prices, it can potentially be extremely advantageous. Now, you are not going to be correct all the time. Look at anyone who has invested in energy over the last 10 years. Not a pretty picture. Still, the need for energy is not going away so the final chapter in that book has yet to be written. By the way, that may be a piece of current reading material you should read quite thoroughly. In sum, with the S&P 500 trading at 14-15x earnings and the ten year Treasury at just over 2%, the market is pretty interesting. It may get more so in due time, but chalk it up to market risk.
Elsewhere in the markets, there were very few earnings reports this week, though Verifone (NYSE:PAY) posted good results but guided down. AOL bought Millenium Media in an effort to help bolster their burgeoning advertising platform. Apple (NASDAQ:AAPL) is slated to have a new product event next week, where they will introduce the new iPhone, a larger iPad, and their most recent revamp of Apple TV. China's joy of a market will open again and their economic news will impact trading sentiment. Should be an eventful week.
Market Update For Week Ended 9/4/2015
Another Week Of Volatility But Fundamentals Remain
It's been 10 days since the 1,000 point plunge of August 24 and the world has not come undone. After the day of that dramatic plunge on Monday, August 24, the Standard & Poor's 500 closed with a slight gain for last week. This past week, we were not as fortunate. The S&P 500 ended down 3.4%. It was the second-worst weekly drop of the year. The index is down nearly 10% from its peak of 2,130.82 reached May 21. Should you worry?
US Jobless Rate Falls To 7-Year Low; Fed Move Still Unclear
U.S. unemployment fell to a seven-year low of 5.1 percent last month, but hiring slowed - a mixed bag of news that offers few clues to whether the Federal Reserve will raise rock-bottom interest rates later this month.