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As the World Turns

Our growing concern over market participants’ lackadaisical approach to what will inevitably become a contractionary monetary cycle has been evident for months. The US market crash of August 24 has disrupted the comfort levels of many investors, however, but it has not derailed the confidence of long-term planners, nor has it interrupted the conviction of optimists that believe the sky is the eventual limit for equity prices in their lifetimes. We take a more measured and cautious view of risky assets at Valuentum, and we’ll never tell investors to ignore the information contained in market prices.

The risk of a recession in the US beginning this year is remote, but concerns are mounting for 2016. US gross domestic product continues to expand at a nice pace and the US employment rate is sitting at the lowest level it has been in years, while job openings approach multi-year highs (or a “new series high,” according to the BLS). Times are great in America, but the rest of the world is not so lucky. Chinese equity prices have collapsed, though many with tremendous hindsight vision say this was obviously going to happen, even if the recessions in commodity-dependent countries such as Brazil and Canada may not have been equally predictable. Brazil’s credit rating is now junk-rated, according to S&P, South Africa’s GDP is shrinking and the rand is setting currency-crisis lows. Nigeria’s economy, the largest on the African continent, is slowing considerably as a result of the slide in crude oil.

Peculiarly, we felt the air come out of the equity markets in January, either as investors opted to de-risk in advance of the sixth year of this bull market or a result of the collapse in the energy resource price environment, both equally plausible explanations. It is quite feasible that the investors who had bought into the “peak oil” thesis, theorized by Shell geoscientist Marion Hubbert and defined as the point in time after which the rate of production would enter into terminal decline, finally threw in the towel. Originally predicted that annual production would peak in 1970, the “peak oil” theory had been somewhat accurate for years, and energy price “bulls” did their best to make the case that “peak oil” had already occurred up through late last decade, propping up energy stocks as the story proliferated. “Fracking” in the shale rich regions of the North Dakota Bakken, South Texas Eagle Ford and Niobrara formations have changed all of this thinking, however—or at least it should have. Some are still holding on.

Many investors are hurting. The largest energy stocks, believed to be stalwarts even during the toughest times, have given up large gains. The strongest of the strongest, Exxon Mobil has fallen to ~$70 per share from over $100 in 2014, Chevron has dropped to the mid-$70s from over $130 over the same time, and ConocoPhillips has performed equally as poorly. Midstream giant Kinder Morgan’s shares have collapsed...