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Struggling Stocks, Booming Commodities
The NASDAQ is down -12.5% YTD in 2005. S&P500 index
suffered -5.7% this year. The US stock market was terrible
over the past few months.
Not only is the overall market down, but so have oil stocks recently
also a significant correction. It’s easy to get nervous
due to short-term failure. However, to succeed
with long-term focused value investing, we cannot be distracted
unstable short-term market movements. The time has come
step back and look at the big picture of the current stock
market and revise the investment strategy to generate profit in this way
Total reserves and oil reserves
The chart below shows Energy’s performance over the past year
Index ETF (ticker: XLE) and S&P500 Index (ticker: SPY). Pa
looking at the graph, even a fool will know that the oil market
is on the rise, while the US stock market as a whole is struggling.
Simply put, the current US stock market is not optimistic
market. The heyday of the 1980s and 1990s, when anyone can
just put some money in an S&P500 index fund or a decent US
mutual fund to earn 10% to 20% plus annual performance
long gone. I expect that over the next 8 to 10 years, American stocks
the market as a whole will stagnate.
If you believed that 20 years of the stock market
performance between 1980 and 2000 is the stock market average
performance, you’ll be shocked to learn that it’s simple
before this period in the 1960s and 1970s the US stock market
did not go anywhere. Dow hit 995.15 in 1966 and Dow returned to 800
in 1982. If you were a long-term investor who invested in the
Dow index fund between 1966 and 1982, you got minus -20%
return a total of 16 years of loyalty, how would you
feel about it?
Do you still remember the peak of the NASDAQ 5000? in my opinion
The NASDAQ is a messed up index full of expensive stocks
even today. I predict we may have to wait for another one
decade to redefine the NASDAQ 5000.
The current average valuation of the stock market is not cheap
The SP&500 is currently trading at about 17 times its average PE today.
Although this estimate is not very expensive, it is not
which is cheap either.
Over the past 100 years of US stock market history, the market
usually bottoming out at an average PE of 10. This happened in 1974
or 1929 or 1980. We’re not there yet, not even close
over the past 5 years, even as the tech stock bubble burst
in 2000. We should see the bottom of the major stock market
many stable large-cap companies trading at low PE
teenagers Now look at this: Coca-Cola (KO) PE 20, Walt Disney
(DIS) PE 24. Even worse, non-growth stocks like Sun
Microsystems (SUNW) is still trading at a PE premium of 19.
What is the overall outlook for US stock market returns?
Although the current valuation of the stock market is not
cheap, if the salary is good, the market should work well.
Will we get an excellent overall revenue outlook in the
next few years for the US stock market as a whole?
Unfortunately, my answer is no. I guess US stocks
market returns are generally decent, but not good enough
cause a bull market. This market is still being digested
past overvalued bubble coupled with low returns
This is one of the reasons for my not very enthusiastic salary
forecast: rising oil and commodity prices.
The price of a rapidly increasing commodity
The commodity and oil market has been developing rapidly since 1999
high commodity prices are reflected in the stock market as a whole
salary Companies have to pay more for essentials
in business: steel, copper, oil, natural gas, etc.
Historically, when the commodity market shines, so does the stock market
not very good, and vice versa. In 1960-70s.
oil and commodities have had a bull market for nearly 20 years
while the Dow Jones has had a terrible performance for nearly 20 years. From
From 1980 to 2000, the stock market soared and oil plummeted
The growth cycle of oil and commodities can be very long
Jimmy Rogers is a well-known investor, co-founder of Quantum Fund
along with George Soros. In his recent book titled “Hot
Commodities,” he predicts the current commodity
the bull market may continue into 2013 solely due to supply and
In one of the chapters of the book called “Goodbye Cheap Oil”, he
clearly lays out the reasons why oil and natural gas are bullish
the market may last until the next decade. It’s as simple as
supply and demand: rising demand combined with falling demand
In part because of this, supplies of oil and natural gas have declined
to extremely low oil and gas prices in the 1990s. More than 35
years there were no major oil discoveries in the world
old oil fields are being depleted. Extraction of oil and natural gas
the well level does not remain constant throughout the life of the well
reserve. The production rate of the well is actually decreasing
gradually due to the geophysics of the oil well to the reserve
completely exhausted. Even there, a new oil field has been discovered
it will take ten years after discovery to actually produce
Oil! Increasing supply to meet demand is very difficult
and a slow process.
Coupled with a decline in supply, demand for energy from
China has doubled since 1990, consuming 8 percent of the world’s oil
in 2004, the US economy is growing along with increasing demand for oil
year after year, while US oil production has risen sharply
decline over the past 50 years.
But the price of oil is not that high from a historical point of view.
Even with today’s oil price of 50 dollars per barrel, the price of oil
still much lower than adjusted for inflation
peak price of $90 per barrel in the 1970s.
Value investors don’t need a bull market to make money
As scary as potential problems in the stock market
a tough environment is a great time to make money
investors to pick up cheap stocks.
Warren Buffett is the greatest investor in the world.
Over the past 50 years, it has achieved 20% annual investment
years. However, Mr. Buffett’s performance in a bear market
In the 1960s and 1970s, returns were 30% per year, a lot
above his average.
Focus on cheap stocks and the fast-moving commodity market
Stocks don’t go straight up and they don’t go straight down. It will be
there could be a big rally or a sharp sell-off in the short term. While the market
not in good shape, this will be a great time for
long term investors.
The price of raw materials is unstable. Just like the stock market,
the price of raw materials does not go up or down.
Although the price of oil has weakened recently, I firmly believe this
the price of oil will not return to a cheap price below $40
a barrel While oil and natural gas prices remain high, oil
stocks will do great in their business. As painful as
the recent sharp selloff in energy stocks, energy stocks in the
generics are still very cheap and my investment strategy
continue a long-term focus on them.
In the short term, it is very difficult to know when stocks will be
to go up or down. But I know that assessment and salary
questions and investing in cheap stocks trade significantly
below the market average will be beneficial in the long run.
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