Possibilities and Probabilities

By Roger Nusbaum | September 02, 2008 | 1:35 PM | 0 Comments

Anything is possible but very little is probable.

This is the thought I have as I look at the many price distortions that abound in commodities, stocks related to commodities and currencies related to commodities. Over the last month and a half there has been a big one way decline in this area, at the same time the greenback has skyrocketed. The size and velocity of these declines have drawn all sorts of commentary that extrapolates these declines further into the future.

Big one way distortions have happened many times before. Invariably they stop and usually they snap back. It is possible oil is headed right to $75. It is possible that gold is headed right to $650. It is possible that the dollar index is headed to the moon. It is possible that all of the market segments that provided leadership are done and should be sold.

How probable is it that all of these things are over and should be sold? From a market mechanics standpoint it is tough to think that a multi year theme, which has had big drops before, has ended with so much noise and that so many people are right about it ending.

I am a big believer in the long term fundamentals of all of the things that have corrected in the last six weeks, a big believer, but moderation is key. There is a delicate balance in selecting a weight that is large enough to give the portfolio a lift without being so big that either the portfolio or your perception of it does not get taken down. 

If you know the fundamentals you know they are compelling. But compelling does not mean that prices must go up. I think they will but they don't have to.

Some folks think 20% in emerging markets is right. Well maybe but when the tide turns, like now, that sort of weight will be very difficult to deal with. I don't think the best time to learn about individual volatility tolerance is after a big decline.