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MP Wealth Advisors Blog
2015 PDF Print E-mail
Written by Dan Petrey   
January 02, 2015

Happy New Year

2014 is drawing to a close. As I write this it is Monday afternoon on December 29 and the markets have closed for the day. While the stock markets, (especially the U.S.) continue to trend up strongly I often prefer to buy things that are down or seriously disliked. These types of investment decisions will often take more patience then many prefer as human emotions can send assets to unimaginable lows and highs.

Many contemplate the possible reasons for continued equity market strength; excess liquidity provided by the Federal Reserve, a recovering U.S. economic recovery, a worldwide flight to quality, or just big money managers following an established trend. They may all be right to a degree or it could be something unbeknownst to many. Whatever the reason, many of you know I have been cautious as I believe the premium is high when investing in the current stock market environment. I will instead scour assets in search of things for sale at significant discounts as opposed to investing in assets with excessive premiums.

In order to find discounts one need only to look at assets that have declined in price. Hopefully that decline in price is not due to decreasing fundamentals but due to some extraneous factor that will reverse in due time. One should not forget that the cure for low prices, is low prices. Oil has fallen from north of 100 to the low 50's in the span of six months. The decline has quickened recently when OPEC convened and the Saudi's decided to leave production alone instead of tightening as many expected. I tend to believe this is more political than due solely to a global lack of demand. I believe the lower oil price (while hurting many domestic drillers) is seriously impacting Russia and Iran and that does not bother us at all considering we have imposed sanctions on both countries. So, while oil may fall farther there will eventually be a reversal to the mean and prices will move upward. Remember, I believe that cheap oil is a thing of the past and when companies lower the rig count because drilling is no longer profitable prices will respond. Of course, Saudi Arabia could decide to tighten production and price would respond immediately as those short oil will be forced to buy back. Most prolonged bear markets will end with a short covering rally. Fundamentals drive markets but human emotion and trend following money managers push those markets to extremes. It is extremely important to realize that patience is key. Assets can fall farther than anyone may expect and volatility often increases at tops or bottoms as trend followers want the easy money making trend to continue ad infinitum.

Another asset class that should be coming to a bear market bottom soon are precious metals. This bear market is close to (or has already exceeded) the maximum length of previous gold bear markets. Fundamentals continue to be supportive of price even if the price itself is not indicative of bullish fundamentals. Commodities can often correct fifty percent off of bull market tops and gold is not that far from fulfilling that accomplishment.  Sentiment is terrible and just about everyone who has invested in this sector is fed up or thinks the bull market is long gone. This is the kind of sentiment we look for at bear market bottoms and volatility has definitely picked up recently.

If the economy or the stock market rolls over the Federal Reserve will stop at nothing to prevent deflation from taking hold. If they have to start up QE again I definitely think some of that liquidity will find its way to undervalued assets.  

Written By: Daniel Petrey, CFO, MBA

 
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