Over valued markets swing to undervalued, and back again, in sync with human emotions whether the trading is done by people with slips of paper on a noisy floor, or by silent computers swapping with each other, because they are programmed by humans.
I fully expect this market to sink, and certain issues in particular, to levels that make no sense.
Investors, speculators and gamblers alike have to determine how to handle this reality. I fully expect to see 16,000 on the DOW before we see 17,000. And maybe 15,000 or lower also.
Today, August 21, note the following:
After a serious, but not unprecedented, decline in oil prices the yield of certain key oil companies is at historically high levels.
XOM is within a hair of a 4% yield.
CVX is almost at 5.5% yield.
COP is almost at a breathtaking 6.5% yield.
RDS A/B is at 7%.
These are the types of yields, especially given the impact prices have had on cash flows, that foretell dividend cuts. COP at 6.5% yield is unheard of, but the fact is that cash flow, and profits, have been whacked extremely hard.
XOM at a 4% yield must be some kind of Guinness record. (I'll drink a Guinness to that.)
And in the minor leagues valuations and returns are well into the massive red flag zone.
BBEP yields 22.22%, for example. Clearly the health and survival of the small players is doubted by many.
(I am struck by the similarity of the oil collapse to the gold collapse, and would love to know if there are many uncovered shorts driving oil into the basement, as have been alleged with gold.)
So what's a person to do when Ms. Market is being so playful?
I have no idea. Some of us, me included, are not so sharp at the options game to really defend against the down-move. My own plan is simple, I will average down on the best and strongest, hoping to build yield, and be positioned to service what may be a long bear market in oil and very weak prices.
That leaves me with the four choices above. While positions taken now in LINE, VNR, BBEP and so forth may prove to be absolutely brilliant in the future, there is way too much risk there for me.
Were I to have a big nest egg to invest today, I'd likely do the following:
Yes, I'd put about 5% into PSLV (or AGQ) because I think the risk is quite high in our world wide economic system, and I think gold could take off. Silver is likely to do bigger percentages. So I'll go with silver.
So much for investing a big chunk. With my smaller monthly retirement plan contribution I'll probably be buying XOM.
Depending on my emotional state, maybe a little CVX, or RDS.
How would you handle today's weak and fickle market?
AFTER THE CLOSE ADDENDUM:
The market was down over 500 points on the Dow 30 today. XOM was down about 2% on the day, and CVX down about 4.4% at the close.
While I'd stay with my "never predict a turn" philosophy, I would ask if that kind of sell off is rational. The answer is probably not.
Will CVX and XOM go out of business? I doubt it. Where will the rout stop? If CVX fell for ten days at this rate it would be a $40 stock. Make that 20 days, and its a $5 stock.
KMI at $23 or RDS.A at $35 anyone?
Disclosure: I am/we are long ALL OF THE ABOVE.