Our Shopping List Is In Hand, But We're Being Patient

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As we begin the New Year, I wanted to give a brief synopsis of our view of the financial markets, particularly as it relates to the increase in volatility.

We have all experienced this before. Whether it is Greece, Russia, Lehman Brothers, Dot Coms, Long Term Capital..., the list goes on. The market simply does not like uncertainty. And as always happens, investors find a target for that uncertainty. For now, their attention has turned toward China. It is clear at this point that China has overbuilt, especially true in the last decade, and is now entering a necessary period of economic adjustment. The engine for growth has paused in a sense as their economy switches from one dependent upon infrastructure spending to one based on domestic consumption (consumer spending). For a country of 1.4 billion people, this is a major undertaking and will not only take some time, but will also create economic fallout to varying degrees around the globe.

China's consumption of raw materials lifted the prices of commodities across the board. That torrid pace of consumption ended in 2014. When the largest consumer of basic raw materials suddenly stops consuming prices go down. When commodity prices go down in unison it reduces the incomes of many, many people and countries. China was building infrastructure and consuming raw materials at an unsustainable pace for the last decade. China's gross domestic product rose almost 500% over that period of time. What is unsustainable must end.

The markets will adjust to these new realities. Right now capital is flying out of the third largest economy in the world reflected by the drop in the Chinese currency. The market is now realizing that the reality of growing an economy the size of China at 6-9% a year over the long term is a fairy tale. The investors that were caught unaware of this dynamic are now selling. As always happens, people get scared of the unknown and the selling then feeds on itself. I expect that the Chinese Monetary Authorities will figure out what to do sooner rather than later about the currency and the markets will calm down.

On a positive note, the result of this is that many great companies are beginning to sell at discounted prices. Should they reflect distressed price levels, as if the whole industrial economy will never grow at a good pace ever again, we would become aggressive buyers. For the short term we believe this is a good time to add very selectively to equity investments. Our shopping list is in hand, but we are being patient. If you are interested, we would be happy to discuss what we believe are some compelling values, or just to provide a more detailed view of our outlook for the markets in general.

 

Michael D. Cohn is Founder, President and Chief Investment Strategist at Atlantis Asset Management.  

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