anyoung haseyo!

it means hello. It took me a week but I've finally fully adjusted to the 13 hr time difference here in Korea. I haven't been following the market newsflow all that much since I've been here aside from browsing the headlines on bloomberg.com. I've only been paying strict attention to the news regarding my positions and of course, the one day where I would be most vulnerable to missing out on the market (the day I arrived), there was huge news regarding one of them, tec.to. They announced a merger with esn.to. The stock had run up big time in the prior week obviously due to this news leaking and then sold off sharply after the news was annonounced. I'm not sure if I would have taken action had I'd been there to trade the stock after the news. I probably would have lightened up. At this point though I'm Ok with just leaving the position as is after the pullback. The fundamentals for the energy services sector with a North American oil focus are rock solid so long as oil is at at least above $70. There is boom going on for unconvential oil drilling i.e horizontal drilling and fracing and although nobody can give a definitive number, in my opinion, so long as oil is above $70, it's been quite profitable for such unconventional drilling to take place. I'm assuming this to be true because in 2010 the oil service companies I've been tracking had an explosion in earnings vs 2009 with solid 3rd and 4th quarters and this was achieved with the price of oil ranging from $70-85 for most of 2010. With oil now solidly above $100 these service companies are in a sweet spot because even if there's a serious correction in the oil price they will still be in great shape to make lots of money. Of course, there's other factors to consider but the price of oil is by far number 1. Other positions I have in this sector are isc.v and wzl.to.

I can sense that the concern on everyone's mind right now is the price of oil being as high as it. The market's strength is confounding everyone it seems. The conventional thinking is that there's no way it can sustain these levels and sooner or later we're gonna have a serious correction/bear market and mabey even a double dip. Well, you know what think about conventional thinking. There's no doubt that the sharply higher price of oil is a drag to the overall economy but is it a killer? I don't think so. Food and energy prices have been rising but as a whole it makes up less than 20% of average disposable income in the the US and it's probably about the same for other developed nations. Yes,I know this percentage is a lot more for Emerging market countries but the bottom line is that overall, rising energy prices is not the economy killer it once was. Over the last several decades the food and energy expendatures as a % of income has been on a stready decline and is much lower now than it was say 30 years ago.

Let's also look back to the 2003-2007 expansion. In the economic cycle prior to it, oil hit a high of about $38 before tanking to $20 as the recession took hold. As the recovery took hold, by late 2004 oil handily exceeded the previous cycle high reaching $55 which was also an all time high at the time. Just like now, people thought this was surely going to kill the economy but it didn't.

I've been saying the following on these pages over and over. What kills an economic expansion is tight monetary policy accompanied by public optimism which also tends to coincide with investor greed. The bears will point out that energy price spikes have caused recessions, namely in 1980 and 1990 but those 2 periods also happened to coincide with tight monetary conditions - the true killer. Every recession post WW2 has been preceded by tight monetary conditions i.e and inverted yield curve. Yes, folks, it's been that painfully simple to predict recessions and thus bear markets yet it's amazing how few of the pundits seem to realize this.

In absence of tight monetary conditions what will an energy spike do? It will likely be a drag on the economy but not a killer. Seeing gas prices rise 30% in just a few months will have psychological effects no doubt but at the end of the day, if you still have your job and more and more people formerly out of work are getting jobs, paying an extra $20 at the gas pump is probably not going to be all that serious. Think about the reverse. If you were out of work and people were losing jobs steady how much of a help would saving $20 at the pump be? Not much. And by the way, do you notice how nobody talks about the rapidly falling prices in electronics and other goods over the years? Also, clothing, appliances and autos have either been flat or declining modestly year over for the past several years. Of course you don't hear nobody talk about this things because everyone is a miserable fuck and likes to focus only on the negatives. And not only have prices been declining for these above mentioned goods, the quality is constantly improving giving you even more bang for your buck.

Ok, let's get down to the bottom line here which is this. There will be some sort of a "shock" factor with the price of gas soaring like it has been but it's not nearly large enough to derail the economy. Is it enough to adjust expectations for earnings lower? Yes, but the impact will likely be modest and eventually people will adjust to these rising energy costs by being more efficient and learn to accept them as the norm. Here in Canada there was this fear years ago that the Canadian dollar trading at par with the US would destroy our exports and thus sink our economy. That has hasn't happened.We learned to adjust and deal with it.

I continue to believe that we are in a consolidation phase in this bull market and dips/corrections should be modest because conditions for a serious decline i.e. bear market are absent. At this point you need to be selective with your positions and if you've think you've discovered a real winner don't pay much attention to the general market and have the courage to stick with it. If you have positions that have been dragging ass not living up to your expectations then you should consider dumping them or lightening up.