The Market: October 2014

It seems to me that the geopolitical world order runs like a casino blackjack table.

There exists a set of game rules called The Basic Strategy, which you can buy at the casino gift shop to show you what to do when you have a certain hand and the dealer is showing a certain card.  Even though the game’s odds are in the house’s favor, as long as all the players at the table abide by the rules laid out in The Basic Strategy, everyone is happy and the game moves along.

Blackjack tables become acrimonious when one or more of the players fails to employ The Basic Strategy and begins to split 10s, or hit when the dealer shows a six.  A happy table quickly sours.

The real-world events of the past month are analogous to just such a card game.  Players like Russia and ISIS not being rational, add to that some Ebola and nervous central bank watchers, and the harmony of the global markets dissolves.

Last month I wrote that September and October can be rocky periods for stocks, and so they have been.

Stocks as well as commodity prices and interest rates have been in sharp decline as the events mentioned above create worries about the health of the global economy.  Algorithmic trading and high-frequency trading have added to the volatility.

Regardless of the fears and maybe because of them, I still believe that the decline in stock prices represent a correction and not the start of a bear market.

Conventional Wisdom About Oil Prices

It is also amazing to me how conventional wisdom can change.  A few weeks ago oil prices were thought to be heading higher with analysts calling for prices to rise to $120 per barrel.

Today I heard an analyst calling for oil to fall to $40 per barrel.  I have found that when you hear extreme predictions, the best trade is to go the opposite way.

Falling oil, while bad for oil companies should be good for consumers:  with gasoline prices at the pump below $3 per gallon, consumers’ disposable income increases, benefitting retailers, restaurants, and perhaps casinos.

Interest rates have come down, pushing mortgage rates lower.  Some banks are reporting an increase in refinancing applications.  This too should add to the money consumers have in their pockets to spend.

Also helping consumers is the strength of the US dollar.  The US dollar, despite the rhetoric about our central bank ruining our currency, has actually appreciated.  In part, this is due to actions by Japan and Europe to weaken their own currencies to stimulate their economies.

A stronger dollar makes imports cheaper.  As we all know the US imports more goods than it exports so a higher dollar results in net savings to the country.  As I wrote last month, a correction would, to me, be a buying opportunity. I am looking at sectors that have been hit hard like energy but also at consumer stocks and US and non-US companies that would benefit from a relatively stronger US dollar.

— Ian Green, Pendragon Capital Management

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.