This welcoming admonition, according to Dante, was prominently displayed on the gates of Hell (the Inferno). Certainly Dante had no concept of capital markets or the stock market; however, after this week’s action at the corner of Broad and Wall, his dire warning might be a fitting inscription atop the portal of the New York Stock Exchange. Last Friday, August 21, it appeared many had ‘abandoned all hope’. Panic has finally set in. We are finally getting that 10% (maybe more to come) correction many have been pining for over the past few years, and we are getting it with a vengeance. What the Greek situation failed to trigger two months ago, China and $40 a barrel oil appear to have accomplished in about two weeks.
Fear of a Chinese economic melt-down, fostered by a slight (3%) Yuan devaluation (after a 25% increase vs. the $ since 2006) and the bursting of a speculative bubble in now-cratering Chinese stocks (brought about by government stimulus to turn an intentionally-slowed Chinese economy around). Reinforcing China fears was a six-year low on WTI at $40. The market seems to be viewing this as a further sign of a global economic slowdown. My view is extreme oversupply vs. growing (but no spectacularly) demand. All of this was brought about by the U.S. shale oil revolution and the Saudis producing full-bore to retain market share and punish their enemies (US shale, Iran, Russia and ISIS).
Regardless, nothing was sacred this week
Stocks with good stories and earnings to back them up, value stocks, high PE/ supposed hi growth, REITs, Utilities, high-tech, bio-tech, all were given a drubbing. Friday saw the Dow -3.12%, Nasdaq -3.52%, S&P 500 -3.19%, all in correction territory. The panic was highlighted by the action in the CBOE volatility index, VIX. It was at 13 Tuesday and hit 24 Friday. This indicates people were buying put options to protect their downside in a panic frenzy. They did not care what the protection cost. I’d say they were scared. Oh yes, they are even selling the dollar, which at its strongest vs. the Euro was trading at $1.05 back in March. It went out Friday at nearly $1.14 to the Euro.
What were they buying?
But of course, the old standards for the ‘end times’ … they were buying gold, up 7.4% since August 4, half that in the last three days. They love the U.S. Treasury 10-year note at 2.045% (down in yield from 2.5% in June) vs. the S&P 500 with a 2.1% dividend yield. Which do you think will be the better investment over the next 10 years? Regarding the drop in the TSY yield, this is in the face a potential move by the fed to increase rates in September (1/4 of 1% from near zero). Based on this action, my bet is that if the Fed does move in September, the 10-year yield will move even lower … so much for Fed moves to normalize rates causing a spike in longer rates, killing the economy.
This is a good segue into what you might want to look at here. If you believe, like me, that interest rates are NOT headed into the stratosphere any time soon (maybe not for years), this threat of a small potential uptick has created a good opportunity in interest-sensitive yield stocks, REITs, MLPs and utilities — anything where a perceived rise in rates would cause financial stress because of leverage. All of the above have significant debt; not because they are big risk-taking enterprises, but because of the stable, predictable nature of their business models … rental income on a diverse package of properties; with MLPs fees on storage, oil, gas and petroleum product passing through their pipeline and treatment infrastructure (most MLPs do not produce energy and are not dependent on commodity prices), and; finally people paying their utility bills to avoid being cut off. Good yields and potential dividend growth would be available from each of these sectors. For those not wanting to pick stocks, ETFs, closed-end exchange traded funds and mutual funds are available in all three asset classes. This is by no means an exclusive list. There are lots of good dividend plays out there in other sectors. All of this free advice is subject to our customary disclaimer below.
Final Thought
Maybe I am missing something, but I am have trouble seeing the current situation as dire and warranting the panic that has surfaced in the market. Regarding everything that I know to be true and holy, bull markets do not end in panic. They are born in PANIC (which is what we have been seeing the last few days). Bear markets are bred and born in EUPHORIA, of which we have seen little, or none, since 2008/2009.
Ergo, I am not Abandoning hope. I am embracing it!
What do you think?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.
Good advise ; I am not abandoning hope. This was the inevitable correction and is creating some buying opportunities. Not the same bubble as the 2008 and 09 market
Agreed, this is very ugly and scary, and that is the way capitulation looks. Very likely not the end of the world. Even if it were, why would you bother to sell your stocks? As Mr. Buffett oft points out: We “should be greedy when others are fearful and fearful when others are greedy.”