Hi Victor -- Thanks for responding to my last post, which I hope provides some clarification for those investors who might have been confused by some of the prior messages. As far as responding to your questions, I use a fundamental analysis of the markets, specific industries, economic conditions here and abroad, interest rates, etc., etc., to develop a broad overview of both the overall investment environment and the current and future outlook for specific industries. These considerations are used as a basis for my issuance of signals for the Selects, although the timing of them is still primarily based on technical indicators and detailed momentum and charting analysis. I do not disregard what is going on in the real world, turn off CNBC, cancel my subscription to the Journal, and only look at charts for guidance. Investing involves opinions and judgements, so excluding the real world is impractible, and is not done by an fellow asset managers who I have gotten to know personally through the years.
As far as longer term projections, opinions, or feelinsg about various sectors, I have always, as my long term readers can attest to, staunchly avoided making any predictions about the future of the markets, or specific sectors. Obviously, there are denizens of so-called market gurus who are afforded the opportunity to give their predictions on national TV, then after they are proven to be incorrect, they never lose any credibility and are cordially invited back a wekk or two later to rationalize their previous incorrect judgements and come up with new ones.
I do have my own opinions about certain sectors, and for a very comprehensive overview you might want to check out this past Monday's Wall Street Journal where an industry by industry review was published. It is very informative, and after reading it you will probably come away with a positive, negative, or neutral feeling about many sectors of the economy.
Personally, I continue to view the fundamentals of the energy area as an extremely promising one. This does not mean that a fund like Energy Services will be the best of the bunch every single week, but the worldwide supply/demand considerations seem to favor continued prosperity for the firms in this sector. This should remain in place until (1) a considerable number of new rigs are constructed, which will of necessity lower the already exorbitant day rates that are being charge and which are boosting profits, or (2) oil prices go into an extended decline, which would reduce new exploration. This too, seems to contradict the longer term supply/demand outlook for oil on the planet. Granted, over the past two years the PE for this fund has gone from 17 to 30 or so, which demands a continued high rate of profitability to support the already inflated prices. Lots of pros and cons, but I favor the sector on a long term basis.
I have never been a great fan of the financial sectors, since it can cause me excessive angst to see my investments tossed to and fro based on the reactionary behavior of the bond market. Within this group, however, I have always favored the Brokerage fund, since it is far less affected by swings in interest rates than the other funds in the sub-sector.
Technology, while obviously the driving force behind the bull market and firmly entrenched in our society, is in a very tenuous position at this time. Regardless of the area within the industry, there seems to be a trend towards supply exceeding demand, and more competition in industries where one cannot get away with imposing price increases on one's customers. Using the most basic rules of Economics 101, this should cause lower prices and reduced profit margins. The eventual impact of a slowdown in Asia, which may take months or years to truly unfold, does not appear to be something that will impact many firms in the industry in a positive manner. The key, I believe, under this type of business environment, is the development of totally new products which can improve a firm's market share and bottom line, as well as cushion the impact of lower pricing for its established products. There will, of course, be times when factors will coincide and we will be able to make good money in the high tech sectors, but I don't believe that things will be as easy as they have been over the past few years.
As you can see by this week's activity, the worldwide markets have begun to decouple from each other, and are focusing more on their home grown fundamentals to guide their actions. There is, however, still a great deal of caution on the part of investors,especially when it comes to making major commitments to equities. Trading volume has slowed, which clearly shows that last week's extraordinary volume was basically a reaction to outside events. I am closely monitoring quite a few sectors for possible new buy signals, but this market needs to be tiptoed around carefully, since from a historical perspective, we could really use another decline and a definitive testing of last week's lows.
I hope this message addresses your questions satisfactorily, and I am looking forward to welcoming you and many of your acquaintances as subscribers in the near future.
Best regards,
Bernie Kaplan
Editor & Publisher
The Sector Fund Strategist |
