April 1, 2014
Greetings All,
It began as a result of the Financial Crisis of 2007-2009. Lacking regulation and supervision of large financial institutions created a disastrous situation that the government, those that allowed the lacking regulation and supervision, had to step in and clean the mess. There are two sides to this story but for simplicity, let’s assume that they have been successful. Unfortunately with this success, there is tremendous investment debate as to how much the political structure really affects the investment markets.
A clear example of this is that the US government is responsible for approximately four trillion dollars of the total US economic output-the public sector while the private sector, you and I, account for approximately thirteen trillion dollars of output. The total economic output in the US is approximated at seventeen trillion dollars (Goldman Sachs Economic Research, 03/03/14). So the confusion is that the US Government is only responsible for about 23% of that output, so how is it that the US Government is perceived as the deciding factor in just how well our investments perform?
It has been 5 years since the market lows of March 2009. Stemming from the events that caused that low, along with a US debt rating downgrade, it is now possible that America is no longer looked upon as the dominant global economic force. It is possible that the reality is that investing in and of itself is more global than we think; look at what happened to the investment markets performance during January and February of this year as a result of weakening Emerging and Developing Market news; look at what happened to the investment markets just recently when Russia was suspected of improper military actions in the Crimea and how that has continued to create volatility.
If you will recall my January letter, I stated that I thought markets would be volatile this year but that we should hold our long term investment focus and maintain our emphasis on good quality investments, proper asset allocation and adequate risk assessment. To support my thinking, on 5 Feburary, Bloomberg interviewed Marketfield Asset Management LLC’s, Michael Shaoul in which the article quotes, “Eighteen times Michael Shaoul has watched the U.S. stock market lose 5 percent or more since 2009. Eighteen times he’s been rewarded for holding on. The bulls are being tested anew by a retreat that started in emerging markets and has since spread to developed countries, erasing $3 trillion from global equity values but Marketfield’s Shaoul’s isn’t selling.” That was early February and we can see today that global news has improved and so has the market indices of the DOW and the S&P 500.
This demonstrates to me that “geopolitical risk” is no longer an annoying itch; it has become a more dominant factor influencing the way we invest. 20 years ago, news of the Crimea would take days to get to the investment public. Today we knew about it almost instantaneously! China, Japan, Europe are major economic factors in this global economy. All countries, arguably are just as important as America. This speaks volumes for the importance we must place upon our investments and how such “geopolitical risk” may affect the investment decisions we must make in order to achieve our long term financial goals.
I am not saying that we are void of concerns. What I am saying, “are we putting more weight on political issues than on the merits and quality of the companies in which we invest”. I think the” majority” is placing more emphasis upon politics and is missing the forest for the trees so to speak; creating short term volatility without real long term merit.
So…What actually drives the price of a stock? In the long run – earnings determine market price; in the short run – emotions determine market price. Let’s consider the latter for a minute. Doesn’t it seem that we are most pessimistic on an investment when the Government is doing the most absurd? Case in point, October of last year…the Government shut down and everyone was questioning the investment world, selling their investments and in hindsight, this created a great buying opportunity for November and December. Did we take advantage of that? Some did, some did not but this is only an example of how short term emotions dictate stock performance. If we select investments that are sound and of good business quality, over the long run, if that company grows earnings, then we could surmise that the stock price should also grow- not guaranteed of course. One of the proven best investment managers of our time, Warren Buffet, just quoted in his annual letter, “Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important”. Facts like product, management, product demand, revenue growth, earnings growth, dividends, debt, etc. All of which may be great but the short term puffery is blinding investors to the possible rewards of great companies.
This market report is trying to focus upon the cause and effect issues of investing. Without a guide, the cause and effect reporting from the media may become very negative and create unsuccessful decisions damaging long term investment results. My clients tell me that my evaluations and education in summarizing these cause and effect issues in a clear and understandable manner has created tremendous value in helping guide them through todays information barrage; at times, information that is insanely complex.
I continue to look at the retail economy and see much more activity than I have seen in the past 5 years; activity to me that indicates positive forward momentum. The media has to keep things as convoluted as possible and that is not productive for us. My god, look at how much coverage on nothing factual has been broadcast regarding the Malaysia Air situation. Let’s focus upon you!
Regards,
Martin
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