Ah the big picture.
Remember when the worry of the moment a year or so ago was the potential increase inflation? Well guess what, the worry is now deflation and a drop off in demand. I suppose if you have been reading these notes you know that I have been a concerned about the demand side of the equation for some time now. You can also see these deflationary concerns show up in the yield curve. For example, the 10 year treasury yield at the beginning of the year for the 10 year was approximately 2.9%, now it is hovering around 2.1%. The 30 year has dropped from 3.8% to close to 2.7%. (TC 2000 charts)
When yields come down like this, the economy is basically looking at growth rates, demand for money and supply of money over that time frame. So if we are talking the 30 year yield curve then we are seeing that the projected growth, not just now, but in the future, is looking a bit weak currently.
Now don't freak out here. This happens throughout history at times of economic weakness. And despite all the rallying cries, the economy is still a bit fragile. There are certainly pockets of strength in health care, etc. but we have some work to do.
Couple this with the strength of technology, which can be deflationary because it pulls expenses and costs out of the system, and an overall workforce that needs to be re-trained and migrated to areas of new technology (i.e. we need fewer typewriter repairmen and more software techs - yes, I am being hyperbolic to make my point ;-) and we have a huge economy we are trying to turn.
I do believe, however, that we will get it turned and that the economy will get stronger over time but for now expect the Fed to stay fairly accommodative in its policy (i.e. read more liquidity) to give us a chance to get moving.
In my last note I did discuss the idea that some portfolio managers may rebalance their risk by moving more toward bonds when the opportunity arose. I think this is happening to a degree but still believe stocks, especially dividend paying stocks, offer benefits longer term.
On a sector note, I am looking at some of the leisure stocks. As more people retire, certain cruise lines, etc. might see more growth. I read in Investors Business Daily (12/19/2014) that Carnival Cruise lines are seeing a bump in quarter four activity. I am not jumping head first into these positions but I am beginning my research. I also note that lower oil prices won't hurt this stock either. Advice: never go crazy about the big picture without looking into sectors, etc. Something is always benefitting.
Technicals
As you all know, oil and energy stocks have taken a big hit. Not only have they out produced demand, but OPEC seems intent on letting more oil into the market with the hope, I believe, of hurting the profitability of the production companies and pushing them out of business.
So one question I get is when something gets slammed this badly how do I approach it from an investment perspective?
Well, certainly lower prices look attractive but the saying that I always repeat to myself in these technical environments is "never try to catch a falling knife". This is a phrase used to warn us from taking positions in stocks when they have dropped so far so fast. When this happens we sometimes think the stocks are good values (based upon our fundamental research) and we try to buy some. But in my experience, what gets slammed this hard is often not yet done going down.
My nature is to sit on my hands and wait. This may be weeks, may be months but I want to see all the sellers out of the stocks. I want people to stop hating the stock and just forget about it. You can see this in the charts over the long term and here are some examples below:
The Falling Knife in Occidental Petroleum: You have to wait to let this play out.
Forming a Base After a Downturn Take Time. Downturn stopped in October but not out of it until June next year.
As for ourselves, we have about 15% in cash to get ready in January. I am not going to be doing anything drastic right now and am creating a list of research I want to accomplish. The economy may have some worries but there is always opportunity. Take your time, study, and execute when you think you have an edge and this will improve your chances.
Well that is our year end note. I hope you are learning something from these pieces. In the end, the person that makes the largest difference in your portfolio is you and I am happy to provide guidance wherever I can.
I wish you all a wonderful holiday and New Year to you and your family.
Dedication: This newsletter is dedicated to our wonderful dog Lucky who just passed. He always exhibited the best traits that can help any investor. He was loving, high energy, and relentless in his pursuits. He will be greatly missed.
