There's something about a roller coaster that triggers strong feelings, maybe because most of us associate them with childhood. They're inherently cinematic; the very shape of a coaster, all hills and valleys and sickening helices, evokes a human emotional response.
As Labor day fast approaches, the end of the summer is in sight. Many families go on summer vacation for one last bonding experience. One place many people visit is an amusement park, and for those who like the joy of fast rides, anything with huge roller coasters works quite nicely. Global financial markets endured their own version of thrills and spills this week, as it certainly was historic by any measure. In fact, you might accurately say there were far more death defying drops and recoveries in U.S. equity markets than nearly any five day period in our countries history. Even for those of us who have endured plenty of volatility over the last twenty years, this week certainly was, well, an up and down experience.
On Sunday night, I was coming back from a trip to Del Mar in San Diego ( more on that later) with my family when I checked U.S. equity futures. I knew they would probably be down a bit after last Friday's poor session, but when I saw China down nearly 8%, the fact that our markets would open up down over 500 was, shall we say, eye opening. Monday morning started with a massive 1100 point drop, and some huge companies traded down in a big way. As an example, General Electric is a 250 billion dollar entity and it's stock price opened up down 20%. According to my simple math, that is a loss of 50 billion on paper. There were other companies which suffered in a similar fashion. The rational investor has to ask themselves, is GE worth 50 billion less today than it was on Friday? With 150 billion in sales, and nearly 30 billion in cash flow, I suspect the simple answer is no. Markets rallied back, but finished down 560 that day, and another 200 on Tuesday after being up the entire time, except the last half hour. Stocks were helped by a strong durable goods number on Wednesday and a 3.7% 2nd quarter revised GDP number on Thursday (beating the expected 3.2% figure). All in all, the market ended up over 1% on the week. Still, the crucial question has to be asked: What prey tell is happening in our markets?
The answer lies in the evolution of our markets into digital domains where every global entity is interconnected. This week, the rule of 48 was adopted three times in the United States. It is a little known and obscure rule the major exchanges use to supposedly help mitigate extreme volatility in order to open trading in an orderly fashion. Clearly, the repercussions of China's trading sessions are clicking through to our shores. In combination with the huge leverage offered in commodity and foreign exchange trading, you can begin to picture margin calls were part of the equation this week. After reading in the Wall Street Journal about how large banks were placing the same message to investors who used equity lines of credit backed by stocks, it becomes clear what took place. Adding further to the confusion, there were large exchange traded funds which had troubles calculating their net asset values because of software glitches. Finally, it was revealed that in August, 49% of all the volume traded in equity markets came through high frequency trading. Lovely. Just. Lovely.
After the flash crash a few years ago, this week's events will not inspire confidence for the average Joe in terms of trusting capital markets. You can see how people now equate investing with gambling, or even video games. Fortunately, that is not the case. Investing always involves the fluctuation of prices, which is why there is risk and opportunity. As someone responsible for handling client, friends, and family capital, it is critical for me to make thoughtful decisions about what assets we want to own in these stressed environment. It requires sober analysis, and perhaps even more important, steady nerves. In most cases, time is on your side, especially when you own high quality businesses. Which is why when they go on sale, the best and the brightest swoop in to take advantage.
In thinking about that subject, highly regarded oil services firm Schlumberger acquired Cameron International for $12.7 billion. Friday, we learned our friend Mr. Buffett bought 10% of oil refiner Conoco Phillips. Carl Icahn acquired almost as much of Freeport McMoran in another high profile purchase. All of these transactions are in the oil and commodity complex, which clearly has attracted interested parties. The logical conclusion for investors is pretty self evident. Good luck in your efforts.
Turning to financial results from specific companies, Tiffany's and Dollar General released earnings which generally disappointed investors. Tiffany was hurt by the strong dollar and Dollar General missed on the top line, and in comparable store sales figure. They also offered shaky guidance for the rest of the year. Next week's big event is the August jobs number on Friday. It will help determine whether the FOMC decides to raise interest rates in September or keep it constant. In the mean time, enjoy 'the ride' this week as it should be pretty interesting.
Politically, it is clear I badly undersestimated Donald Trump's staying power, if recent poll results are anything to go by. It is still very early, but the big news has to be that Jeb Bush is now taking dead aim at Mr. Trump with heavy advertising spends. My own thought is a mano a mano slugfest between Trump and Bush could very well help my preferred candidates, Mr. Rubio and Mrs. Fiorina. Still, I always root for the underdogs, but I like their pluck. Go figure.
Finally, Charlie Munger always compares investing in the stock market to wagering on horses. Last week we made our annual sojourn to Del Mar to engage in our once a year ritual of trying to make a few shekels at the track. In one race, a filly who won it's first two starts by five and sixteen lengths was made a 1-9 shot. The race was a mile, but her previous wins were at six furlongs. Naturally, I bet all the other horses, the lowest whose price was 7-1 and the highest was 65-1. Well, fortunately, we won with a 28-1 shot. Of course, there were the results of all other contests. Don't want to get into that just this second. Anyway, thanks for reading the blog this week. If you have any comments or thoughts about the blog, please email me at
Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.