Whether you characterise what is happening in stocks right now as a mini-bear market or the start of a full scale bear market there’s no doubt that weakness stemming from uncertainty in the global financial system has made investors evaluate their portfolios believing that lower prices are to come.
Well it has for me.
Oil. Iran. The Federal Reserve.
These are the most influential themes on the prices of global stocks right now.
Quite apart from the fact that the PE Ratio for the S&P 500 is in my view indicating an overvalued market, the price of oil, the tensions in the Middle East and the slowdown in the Chinese economy reconfirms my reasoning for being overweight bonds (alternative investments, risk-free if possible) and underweight stocks.
If you go down to the woods today you’re sure of an overvalued stock market
Last week I shared on Twitter and Facebook what I thought was an excellent and concise 8 minute video by Peter Schiff on the impact of the actions of The Federal Reserve on global markets and where we are right now:
Here’s an interesting point of view regarding a possible US recession https://t.co/RptGKtSdPe
— David Thomas (@djthomas) January 14, 2016
Schiff points out that year to date:
- The Russell 2000 is down 20%
- Dow Transports is down by nearly 30%
- The US is already in a recession (in his opinion)
- It is the worst start to a year in the history of the stock market
Schiff has also pointed out that the reason for the recent declines in stocks is not oil or China of what is happening in the Middle East but because The Federal Reserve raised interest rates but it is still hard to ignore these external factors on the prices of global stock markets.
Despite the salesy pitch at the end of the video, Schiff also points out that gold is a good investment now as it is cheap relative to it’s historical value and it’s also cheap relative to it’s relationship with fiat currency value.
Indeed gold is one market place where I’ve been researching this week for the bonds and alternative investments section of the portfolio as exposure to stocks is unattractive at current stock market highs.
For more of a background as to the fragility of the global economy check out this piece from peakproperity.com, here’s just one snippet from the brilliant article:
A relatively minor market slump in 1994 was treated by the then Greenspan Fed with an astonishing burst of new money creation — via its ‘sweeps” program response, which effectively eliminated reserve requirements for banks. That misguided policy created the first so-called Tech Bubble, which burst in 2000.
The next move by the Fed was to drop rates to 1%, which gave us the Housing Bubble. That was a much worse and more destructive event than the bubble that preceded it. And it burst in 2008.
Then the Fed (under Bernanke this time) dropped rates to 0%. The rest of the world’s central banks followed in lockstep (some going even further, into negative territory, as in Europe’s case). This has led to a gigantic, interconnected set of bubbles across equities, bonds and real estate — virtually everywhere across the globe.
However the most important part of the article is
The amplitude and frequency of the bubbles and crashes are both increasing. As is the size and scope of the destruction.
Looks like the bear market will be a large one unless central banks can continue con the taxpayers with their own money into believing that they still have things under control.
Will we see a bail out of Main Street such as tax breaks or tax rebates or even credits directly into your bank account as peakpropsperity.com suggests?
BHP Billiton (LSE: BLT) And The Bear Market In Oil
A case in point for the impact of the oil price on individual stocks this week was the alarming story of BHP Billiton’s $7.2 billion write-down of it’s shale assets due to the current 12 year lows in the price of oil marking declining earnings as a result of lower commodity prices more generally.
It is this sort of story that reminds me to tread carefully when valuing a business from the balance sheet.
But what is particularly interesting for me is that BHP wrote off nearly two-thirds of the value of it’s shale investments, a percentage the I often use to write down the value of assets whenever there is doubt as to a business’s value but where value is in existence.
Two-thirds may seem an arbitrary figure but it has helped me in the past to try and get at least a basic assumption on intrinsic value.
BHP Billiton Long Term Share Price Chart
Chart from Yahoo! Finance
Both Standard and Poor’s and Moody’s have stated that BHP’s current dividend policy is a risk to it’s credit rating as in the past it has either held or raised the dividend – time will tell as to where BHP will go with it’s dividend but it is a stock to watch for now.
Iran And The Price Of Oil
The lifting of sanctions on Iran last week will now allow it to gain access to all the cash from it’s global oil sales but more importantly as Bloomberg states:
Iran is striving to add 1 million barrels to its daily crude production and exports this year amid a global supply glut that has pushed prices 22 percent lower this month.
The report continues:
Iran was OPEC’s second-biggest producer until sanctions were intensified in 2012, and the county is seeking now to regain its former economic prominence… Many analysts expect the country to raise production more slowly. Iran will increase crude output by 100,000 barrels a day, or 3.7 percent, in the first month after sanctions are removed and by 400,000 within six months, according to the median estimate of 12 analysts and economists surveyed by Bloomberg
The oil bears must be rubbing their hands with glee right now as the prospect for lower prices is intensified.
All of this macro economic madness means is that I’m not in the frame of mind to be getting into equities right now and am quite confident that such a large percentage of cash is directed towards bonds and risk-free alternative investments.
This week I’ll begin my first forays into gold and will also be looking at investing in a private business that has very low start up costs but has the potential to generate large free cash flows that can be directed towards further investments.