Friday was not pretty. It was the markets’ version of reverse peristalsis. It happens every occasionally. This time around, the causal stimulus was emerging markets anxiety. As I mentioned on Friday morning, it was a time for caution, but not panic. Unless you were 100% in cash before the day began, Mr. Market took its pound of flesh from you. It did seem that there were plenty of weak hands, likely the typical momentum or over leveraged traders who hit the panic button. I increased my cash levels to about 7.5% for our growth portfolios.
In My Gut Feeling For 2014, I said that “The Sochi Winter Olympics will be a public relations nightmare for Russia. The event will be plagued by old style Russian cheating and new style Chechen political unrest. A terrorist attack during the Olympics, either at Sochi or elsewhere in Russia will precipitate a global market pullback of 5 – 7%.” Well, there have been events leading up to the Sochi Olympics (which begins in less than two weeks) that have surfaced. Particularly, unrest in the Ukraine and Chechen terrorist concerns, have, during a period of emerging markets uncertainty all come together to help spark the market pullback.
So what do we do next? The first thing to do is not to head for the hills. After a near 30% surge in 2013, at some point, any rational investor should expect a pullback. As we now stand, the S&P 500 (SPX) is off about 3 ¼% from its all-time high and just over 3% since the end of last year.
The proper course of action is to look at one’s portfolio and ask this question: what has fundamentally changed in the last three weeks that would require letting go of a position? I have already talked about cutting back on exposure to consumer discretionary stocks. The emerging markets are large exporters of materials. China is a large consumer of materials. With material prices down due to currency devaluation and demand from China reduced, materials companies are not the place to be. Hence, I liquidated full positions in Freeport McMoRan Gold and Cooper (FCX) on Friday. If you own a company that drives most of its growth from the emerging markets, then it is time to let that one go. Try to focus on companies that are more oriented toward domestic or established economies.
No matter how ugly things may be in Argentina or Turkey or Indonesia or China, there are some things that everyone will still demand – that is mobile telecommunications. As a gentleman that I once knew back in the 1970s, used to say, “When the revolution comes, it will be broadcast on cable.” Now he is likely saying that “when the revolution comes, it will spread by smartphones.”
Speaking of smartphones, Apple (AAPL) will be reporting its December quarter earnings after the market closes today. Apple is expected to earn $14.09 per share on revenues of $57.46 billion. In the year ago quarter, Apple earned $13.81 per share on revenues of 54.51 billion.
I expect the equity market to stabilize in the next few days as bargain hunters step up with some cash. However, a turn in the market will likely take more time. We are running on emotion right now and that should never be a factor in decision making.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL — although positions can change at any time.
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