I know risk is a four-letter word to many of you, and most investors prefer not to think about it at all. But it’s a favorite topic in our shop, and with the Iranian capture of 15 British sailors, the risk discussion here definitely stepped up.
You have your pick of conspiracy theories over why Iran took the sailors, who were recently released. I read speculation that the capture was retaliation for an American capture of six Iranian Guards in Iraq in February. Some people say it was a move to spike oil prices. Others believe it was simply a way to distract Iranian voters away from the rapidly deteriorating quality of life in Iran. The point is that we don’t know why it happened.
I was just in Southern California last week and the conversation turned to earthquakes. That will get you thinking about risk. If a disaster struck a large portion of California, equity markets around the world would get rocked. That’s not something you can (or even should) plan for.
And there’s not much you can do to plan for a government doing something insane (like the Iranians attacking Israel with a nuclear bomb), but there are indicators you can watch to see how the situation may turn out.
There were many indicators I watched during the market decline of late February and early March that showed me a top wasn’t yet in place, and many of those same indicators are saying the same thing during this Iran situation-that the risks are not that high to your stock investments.
I rely on these indicators. I can’t know everything. I believe that the cumulative body of people moving money around every day can serve as clues about the future. In the stock meltdown of a few weeks ago, experts were screaming about the beginning of a recession. But recessions don’t pop out of the blue.
Default ratios are one item to keep an eye on. This figure will begin to rise before a recession develops, and it is still near multi-year lows. If the Iranian situation was going to truly explode, oil would have gone over $90 a barrel immediately, instead of only $66. Gold would have spiked to a new all-time high, instead of just rising $15 an ounce. And the prices of U.S. treasuries would still be bounding higher, instead of lingering in a tight range.
All these indicators tell me that people who really know the situation-people who can cause the movements of billions of dollars in hours-don’t think much of it. As of this writing, nothing is resolved. But I am keeping a close eye on the indicators mentioned. I believe they will show us when to take defensive action, if that becomes necessary.
Aside from the Middle East tensions, the market is still dealing with the sharp sell-off from late February. I felt pretty lonely when I wrote on Feb. 27 that a good buying opportunity opened up, and since then the markets have recovered powerfully. But more corrective action is probably needed before an uptrend resumes. It’s likely we will experience slight downward pressure for a few more weeks, and then it should be off to the races again before July arrives.
Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer’s. Hauke can be reached at 566-2162 or at email@example.com.