"Five letters here just for everybody out there in Packer-land: R-E-L-A-X. We're going to be OK."
What do you get when you combine the worst week for the Dow in 3 years with mutual funds paying large capital gains distributions that do not show in the accounts for a couple of days? "P-A-N-I-C" Those who follow the markets too closely are liable to be caught up in these short term gyrations much more than they should. As one long term client told me earlier today, "following the market every day will drive you crazy. Once a month is good enough for me." For those invested in mutual funds, the capital gains will mostly show up as reinvestments or cash contributions by Christmas and ease anxieties. But we still have to contend with the drop last week.
A drop of close to 4% in a week is nothing to sneeze at. I remember back in 2008 when we’d see that in one day. And all this is said to be caused by the drop in oil prices. I’m trying to remember when the opposite happened. I cannot remember a time when oil rallied quickly and market surged up 100 points in the final hour of trading, or 678 points (+3.8%) for the week on that kind of news.
Personally, I was relatively happy to see the dip, especially in oil stocks. It offers us an opportunity that will probably not come along for several years. Not since 2008 have we seen oil prices and prices of energy stocks this low. Will energy prices continue to come down? They may in the short run. Prices will generally drop to the point where the lowest cost producer starts to see profits erode. At that point, production will be cut and prices can go up again. In the meantime, lower gas prices are typically extremely effective at sparking economies. In the past, the lower prices serve as a catalyst to spark consumerism. More is available to the average consumer to spend. We see this being very positive for retail sales and for economies around the world in general. Lower prices will be a short term negative for energy companies but allows us to acquire good companies and great prices. Currently we like MLPs best because their profits are tied to volume transported more than the price of oil. We have increased exposure to these MLPs over the last few days.
Earlier this month, Oil magnate T. Boone Pickens told us that he expects $100 oil again in the next 12 to 18 months. The First Billion is the Hardest is a very interesting book written by Mr. Pickens and contains a good bit of insight on his thinking with regard to energy over the next decade. I would encourage anyone to read what he has to say about energy being a major bright spot for our country's future going forward.
As Aaron Rodgers told Green Bay Packer fans a few weeks back, we would advise investors to "Relax". Investing is a marathon not a sprint. Short term price gyrations give us opportunities to buy when companies are selling at a discount but in the long run everything averages out. Aaron Rodgers told his fans to relax after a less than stellar start to the 2014 season just a few months ago. Now the Packers look to be the favorites to win the Super Bowl. In the face of this recent market pullback, we advise the investors to also relax.
A year from now we expect oil prices and oil companies to be trading at much higher prices. We expect non-US companies to recover more value. We expect smaller US companies valuations to increase more than larger US companies. Large US has done the best recently. Will this continue forever? We doubt it.
Long term investors should remember that market drops inevitably happen, but the largest drops are often followed by the largest gains. We use these drops as a chance to reposition and take advantage of the opportunities they present. On Wednesday the Fed also told us that they "can be patient in beginning to normalize the stance of monetary policy." This means that interest rates may stay low for some time.
As one market pundit, Jeff Saut posted earlier this week:
"This week will determine when we will start the Santa Rally. As stated, I think the downside is mostly played out here and would look for some kind of trading low during the beginning of this week. The question then becomes, “Will that be the start of the Santa Rally into year-end?” Over the weekend I came across an interesting oil to gold chart that suggests while we are not there yet, we are very close to a bottom. Accordingly, I continue to think buying the midstream MLPs into year-end makes sense."
"The feeding trough in America is endless. Everyone can step up. All you have to do is work hard and take advantage of the opportunities you’re given. "