BOOM Part II: Sun’s Out, Guns Out.

By David B. Armstrong, CFA | Jun 16, 2014 | Weekly Market Commentary

I’m glad to see a good old Marine Corps-ism hit the popular media, but it looks like “Sun’s Out, Guns Out” has also hit Iraq as well.  The well-publicized offensive by the Islamic State of Iraq and Syria (ISIS) is all over the news as they roll from Iraqi town to town with little more than piles of abandoned Iraqi Army uniforms to slow them down.  Saying “Jeezzz, there sure is a lot of turmoil in Iraq lately,” is a lot like declaring “Wow, there sure is a lot of gravity these days” (special thanks to my old friend Rob T. for that one).

Crude prices rose last week but keep in mind that Iraq produces 4% of the oil globally every day (a little north of 3m barrels/day). 75% of the oil produced there comes from oil fields that lay way to the southeast of current ISIS occupied territories.  Gasoline is up $0.02 over the last month – so I’m not sure there is reason to panic on this.

Jitters, sure.

Panic? Leave that to the establishment of the Republican Party and the President’s Foreign Policy Team.

Plus, check out the chart below…so there’s that.

And there’s this one, too… We are obviously importing a lot less oil these days and that’s keeping a lid on crude prices.

 

Oh, and don’t forget that in 2013, Waste Management (Ticker: WM) generated 9.8 megawatt hours of energy from naturally occurring gases emitted at waste disposal sites. As a comparison, the solar industry produced 9.3 megawatt hours of energy, according to the Department of Energy. So on top of our increase in crude oil production, WM estimates that the energy generated from garbage sites will power 1.2 million homes…and don’t forget the one disposal site that converts landfill gas into liquefied natural gas for trucks.

One last thought on ISIS…it does not say much about the desirability of the U.S. equipment left in Iraq when I see footage of ISIS troops sitting in their Toyota trucks while setting fire to Humvees. And those are the new ones with A/C and everything.  I wonder what they would have done with the ones I drove around 29 Palms?

But on this side of the pond, we sit comfortably with the S&P 500 up about 6% since the bottom seen in April, and content in the pleasure that goes along with not having to read a lot of “Sell in May and Go Away” articles.

“But aren’t you worried the market may pull back?”

With total props to the folks at Bespoke, I added the blue arrows and the blue text box. What’s the point?  Well one point is you never know what you don’t know. I wrote about this in an article in U.S. News and World report way back in 2012.

Another point is that just because the market gets a little over-bought from time to time does not mean another 2008 is right around the corner.  You can see above that there has been plenty of time in the past when the market has been over-bought (red zone in the chart) and the blue line has kept moving up.

So, what to do?  I’ll tell you one thing. Consider your holdings and see if you are over-concentrated to a few specific stocks without knowing it.  One thing I hear all the time is “I’m looking for someone to beat the S&P 500, otherwise I could just buy the S&P 500 myself and hold that.”  Right – because they are SO DISCIPLINED that they could actually do that.  Before I digress much further, my point is that someone who owns the S&P 500 index may not know how concentrated their portfolio really is.

Look at this chart below. It shows that the market cap of Apple, ExxonMobile, Google, Microsoft, and Berkshire Hathaway have the same market cap as ALL 2000 STOCKS IN THE RUSSELL 2000 INDEX.

The 100 largest stocks in the S&P 500 have a market cap of over $11 trillion dollars.  The 2000 stocks in the Russell 2000 index have a market cap of $2 trillion.  This means that the 100 big stocks REALLY drive the market.  So when you see the S&P 500 up or down for the day, remember, it’s probably more of an indication of how well 100 stocks did that day. The difference can be seen below.

Bespoke made the point “if all 2,000 small-cap stocks in the Russell 3,000 went to zero, it wouldn’t even equate to a 10% correction for the index.”

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