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Market Volatile As Strategy Questioned!

Strategy is about setting yourself apart from the competition. It’s not a matter of being better at what you do – it’s a matter of being different at what you do.” Michael Porter

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When kids are very young, parents introduce games to them as a way to keep their minds engaged. Put another way, every now and then, it helps those looking after them to have a little peace of mind. When I was young, my brother enjoyed chess while I preferred checkers. Chess is considered the superior strategic contest. As society has evolved, chess is now closely watched as the best players in the world often play the most powerful computers with the latest and greatest technologies like artificial intelligence, neural networking, etc. One game both my brother and I enjoyed many years ago was Risk, which is a board game based on armies, warfare, and geography. He also progressed into Dungeons and Dragons, which wasn’t my cup of tea, as I preferred active sports like basketball and baseball. Anyway, these games help people think about strategy. You see, if the strategy is sound, and the execution holds up, well, now you have something, especially when it comes to investing in specific companies. With that, let’s turn towards the market.

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Over the past few days, we saw evidence of what makes the market such an interesting endeavor. With the events in Iran unfolding quite quickly, Tuesday and Wednesday proved that investors cannot decide what they want to do by the minute, let alone the week, month, year, or decade. Before the market opened on Wednesday, futures were down nearly five hundred points as news broke that Iran had bombed a housing instillation in Iraq where US troops resided. Also on that day, we got news that an Ukrainian airplane, made by Boeing incidentally, was shot down in Iran. The plane killed all passengers aboard, including many Canadian citizens. (Naturally, we pay our condolences to those families who lost their loved ones in such a tragic event.) Two hours later, as investors were informed of the fact there were no casualties at the US housing base, the futures started to turn around. During the day, momentum strengthened and the market wound up ahead by over 100 points. Despair to delight in a matter of hours. None of this had anything to do with company profits, mind you. Late in the week, we got the December jobs report, which came in a bit light (145 thousand jobs versus the estimate of 160k). Even with profit taking on Friday, the week was a strong one for stocks. In company specific news, Walgreen missed their number, as did Bed, Bath, and Beyond. Jeffries, a mid sized investment bank, reported good results, which probably bodes well for the largest money center banks when they report in the next few days. Let’s turn back to strategy, though, as it remains a crucial topic.

For the foreseeable future, oil and energy is mandatory to pay attention to. As we all are aware, the middle east energy countries are dependent on oil revenues for funding their societies. Iran is the prime example. With oil prices down and Mr. Trump’s sanctions heavily targeting Iran’s sole source of revenue, well, let’s just say things are tough on the Persian economic front, especially if you are not a member of the Republican Guard. Again, it illustrates the importance of oil in world affairs. Don’t tell that to the Democratic candidates, who want the United States to tie one hand behind our back by crimping fracking and drilling offshore, let alone building more pipelines to transport the valuable stuff. A further look into the refining industry is instructive.

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Approximately five percent of all domestic oil refineries are now up for sale, including Shell putting one up for sale near Seattle. There are a variety of reasons for this, including environmental regulations, tough logistical positioning, size, and increased supply from new locations in the Caribbean. The refining business is a part of the largest integrated oil companies because it serves as a natural hedge on oil price declines. When the price of oil drops, it helps lower the costs of oil for the refiners, typically helping margins. Of course, the margin issue also depends on location, scale, and what other distribution is owned. From a strategic perspective, if the largest oil companies in the world maintain their positions in refining, which they do, well, it’s probably an important area to understand.

On the global stage, the major criticism of US policy in the middle east is a lack of long term strategic clarity. As more information about the Ukrainian tragedy reveals Iran accidentally shot the plane down with a ballistic missile, perhaps the world will understand these are the same people who don’t want anyone to hamper their nuclear aspirations. Then again, much of the world has turned a blind eye to the havoc the Mullahs have wrought in the middle east for many years, so don’t hold your breath. In the meantime, next week earnings will begin in full force with the largest banks first to report. Until then, I hope you engage in chess or checkers to keep your mind occupied with, shall we say, uh, strategy.

Thank you for reading the blog this week, and if you have any questions about investing, please email me at information@y-hc.com.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog,  Investing in securities involves risk and the potential loss of ones principal.  Past performance is no guarantee of future results.  All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation.  The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.

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