Seeking Alpha
Contrarian, newsletter provider, commodities, industrials
Profile| Send Message| ()  

Famous value investor Benjamin Graham wrote the following in his investor handbook, The Intelligent Investor:

In the short run, the market is a voting machine, but in the long run it is a weighing machine.

I would go a step further and say that the market is a sifting machine. It sifts the good from the bad, and the prospectively improving versus the probably deteriorating futures. The market has been sifting through "good" and "bad" credits, non-commodity versus commodity equities, domestic demand stories such as telecom, versus exporters weighted to Europe, etc.

For example, two Canadian Real Estate REIT's we own, Calloway REIT (OTC:CWYUF) and RioCan REIT (OTC:RIOCF), are both up almost a percent today, whereas the commodity and bank heavy Canadian S&P/TSX index is down 180 points, to 11,342 or 1.5%.

As CNBC Mad Money Man Jim Kramer is famous for saying, "Somewhere there is a bull market."

Let's look at the DJIA today. It was down 200 points for most of the day to a level that is near or slightly below the May 6 intraday nadir of 9,869.

As an aside, I am not one of these technicians that give grave significance to the market breaking a particular fictional support or resistance level by a point or two.

The worst performing point losers today at 2pm are Chevron (CVX), Caterpiller (CAT), 3M (MMM), IBM (IBM) and ExxonMobil (XOM).

Is it so surprising the DJIA is down, when it is led by two oil and gas stocks and three multi-nationals heavily dependent on foreign earnings?

Anyone with the ear to the ground should be aware the Obama administration has been gunning to curtail subsidies to oil companies, and support renewables.

The oil leak disaster in the Gulf of Mexico will soon be seen to be the proverbial "straw that broke the camel's back" for the oil industry.

Given two oil stocks have such an important weighting in the DJIA average, it is clear this classic market harbinger of the future would be taking a dive.

Last week, I reviewed some of these leading DJIA stocks, and remarked that it was amazing IBM (IBM) was at $132 on (May 18), given its broad exposure to Europe.

Well, it's at $122 and change today, so certainly there is a method in the market madness.

To give theoretical support to the sifting Machine metaphor, remember the famous Austrian monetary economist Joseph Alois Schumpeter, who wrote his seminal economic works in the first half of the 20th century. I remember locking myself up in the library for several days to read his books on economic cycles.

Schumpeter coined the expression "Creative Destruction" to describe the phenomenon by which capitalism regenerates itself.

That an economic phoenix always rises from the ashes of a severe depression is a phenomenon worth studying, given the events of the past two years.

The boom and bust of capitalism (never more apparent than now) destroys the aging industries that it no longer finds useful, or profitable.

At the same time, the bust provides fertile ground for the industries of the future to be born. Recessionary low interest rates, negative returns on so-called "safe areas" makes the higher risk and lower immediate return on venture capital more acceptable, and entrepreneurial drive becomes a necessity for many as opposed to just a dream.

If you have your ear to the ground, you'll hear the footsteps of the industries of the future advancing.

In future articles, I will describe in depth what I think these industries are, and the best candidates for investment within them. For now, we prefer to play a waiting game in secure, domestically-driven, service-oriented industries.

Disclosure: Author long Calloway REIT, RioCan REIT, BCE and Telus

Source: How the Market Is Functioning Like a Sifting Machine