Don't fear current volatility; think ahead instead

Tuesday, October 21st, 2014

After last week’s column and my comment on the markets not being too volatile in October, we’re halfway through the month and it has been very volatile.

Last week was far scarier than Halloween will be this year.

With that said, I think there could be more volatility coming. But don't be afraid; this volatility is creating great buying opportunities. I would venture to say that over the last week or two, we have probably done more buying than we have in the last six months.

Let me explain what has caused this volatility and why we shouldn’t fear. Instead, project forward for the next six to 12 months and think about where you will be.

First off, we have concerns over the Ebola scare. We went through this with the bird flu and SARS, and although the markets go through turmoil, we find vaccines and come out OK.

One thing investors should not do is try to bet on what they think will be the next drug company to find a cure for Ebola. While many may think they have found the company that will make billions of dollars off the new drug, that is many times not the case, and the odds of picking that company may not be as good as picking the winning numbers for the lottery.

Another reason for the markets’ decline is concerns over global growth, especially Europe. The markets are concerned that the decline in global growth will hurt the U.S. economy. In my opinion, that is not correct unless you own a company in your portfolio that does a substantial portion of its business globally or, more specifically, in Europe.

Remember about 2007 when the supermodel Gisele Bundchen did not want to be paid in dollars, only euros? She was buying high and selling low. She obviously was getting bad advice from her advisers -- or worse, she thought she knew more than they did.

The reason I am not concerned on some slowdown in global growth is because the United States is a net importer, which means we import approximately $30 billion to $40 billion more a month than we export.

So as the world slows, our dollar becomes stronger. And our economy is doing pretty well -- consumer spending is rising. This makes imports less expensive; therefore, the world will be selling more products to the United States, which will help their economies and bring them out of their current slowdown.

And please keep in mind this is a slowdown, not a decline. This turnaround will probably take six to 12 months, bringing us into late 2015 maybe even early 2016. However, investors who are looking out over the next 18 months should do well.

Lastly, there is a concern on the glut of oil and declining oil prices. While this is currently viewed as a negative I see it as a positive, even though we hold two drilling companies that have dropped as much as 40 to 45 percent.

Longer-term, I am confident oil will rebound as demand increases and inventories decline. Once again, prices will go back up and these drillers will rebound as well. Oil trades in a range and is never stagnant. It appears this range is from of $90 to $110 per barrel, sometimes exceeding on both ends these ranges.

The benefit of declining oil prices, which translates into lower gas prices, gives consumers a pay increase. It has been estimated that with lower interest rates, lower gas prices and wages up about 4 percent from last year, consumers have an extra $40 billion or more to spend this holiday season.

This will benefit retailers and other consumer-demand products and services, and the profits of those companies should look good as they report earnings for the last quarter of 2014.

So investors should not panic and sell all their holdings or go to cash in their 401(k)s. What they should do is look at good investment opportunities and think about where they will be 12 months or so from now.

I cannot tell you how long this downturn, correction or volatility will last; I can tell you only that there is a lot of cash that will be put to work as the markets fall. Profits will be made by investors who analyzed the fundamentals of strong companies, bought or added to those companies, and were not concerned about the short-term volatility.

That is what you call the smart money.


Do you have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com!

Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.