To continue from my last post:
Second, I think it’s just as important to recognize that even though the market is very slow and very reluctant to abandon a profitable long-tern macro story, it is very comfortable and indeed very adept at recognizing shorter term shifts in shorter-term stories within that dominant long-term macro story. For example, copper, once the hottest of global commodities has been in a steep fall for the last eight weeks in reaction to Chinese efforts to damp commodity speculation and to slash buying by domestic companies that might otherwise be inclined to build inventories on weak prices. Market reaction to that short-term story has been swift and severe. Freeport McMoRan Copper & Gold (FCX), which mines more copper than any other publicly traded producer, has tumbled 20.44% in the last month as of the close on June 18. Southern Copper (SCCO), which has one of the world’s largest reserves of copper, is down 24.17% in the last month. Morningstar, which had not so long ago calculated that both stocks traded at nose-bleed premiums to fair value, now sees Freeport McMoRan as trading at just a 12% premium. Southern Copper trades, according to Morningstar at just a 7% premium. You can bet that traders and short-term investors are getting ready to jump in on any further decline in the price of copper and copper stocks. (The more adventurous in that group–meaning me in this case–have already started to buy here. I added shares of Southern Copper and First Quantum Minerals (FVLF) to my personal portfolio at the end of last week.) My point here is that revising a story with a short-term narrative happens much more quickly than changes in a long-term story. (Traders and investors bought these stocks on Monday June 21. It remains to be seen whether that buying is a sign of a reversal in the short-term trade or just a one-day bounce.)
Third, revisions to long-term stories don’t happen in a smooth trend. Any path to a revision is characterized by lots of shorter-term volatility. It’s that back and forth of short-term volatility that gradually results in a revision of the longer-term trend. We might get, for example, a series of moves in the small cap Russell 2000 index that amount to two steps back and one step higher on the way to a change in the longer term trend. An increase in volatility almost always goes along with any change in the longer term story. I’d even argue that this increase in volatility is the way that changes in longer term stories come about as the losses and gains that result from an increase in volatility get the attention of investors and say, in effect, Hey, change how you invest and trade.
So how do we position our investments to take what the market is giving us–and to hear what the market is telling us?
Ahh, that’s the subject for my next post
