Iron Capital Insights

  • Iron Capital Insights
  • March 25, 2015
  • Chuck Osborne

It Is What It Is.

This is a great time of year for sports fans. The NCAA Basketball Tournament, better known as March Madness, is one of those events that transcends sports as a cultural phenomenon. People who have not watched a basketball game since last March will sign up to enter their office pools and fill out brackets. The tournament always produces great drama and wonderful background stories.

Of course, as most of our readers know, I like watching basketball all the time. I have coached youth basketball for the last few years, and just this past season I was explaining to a bright young woman with a feisty competitive demeanor that if she wanted to try and steal the ball away from the player she was guarding, she needed to reach straight out, and not slap down. I explained that the referee would call a foul if she slapped down, but likely would not if she reached straight out. She then asked a question which showed her youth and innocence, “Why would the referee call a foul if I don’t actually touch the other player?” I tried to explain how referees are just human, etc., but as her eyes glazed over I resorted to the same answer my coaches had given me so many years ago. “There is no why, it just is what it is.”

I have been reminded of that this past week in my day job as well. Oil has revisited its lows and everyone is on edge over the Federal Reserve (Fed) and the potential raising of interest rates.

Let’s tackle the Fed issue first. Every Fed meeting in recent years has been covered by the financial media as if it were some big event on the scale of March Madness. The pundits line up to talk about when they will raise rates. They all seem to think it is going to happen very soon. I heard one commentator this past week suggest the Fed would raise rates at every meeting this year. Then the Fed does not raise rates and tells everyone very clearly that it will not raise rates until inflation is higher than the Fed’s two percent target.  Inflation is nowhere near that level at the moment, but the financial channels are full of people pontificating on why the Fed’s measures for inflation are wrong or why the Fed’s policy in general has been wrong. They may be or may not correct, but the Fed isn’t going to change either way. It is just like that young man you will likely see on TV this weekend pleading his innocence as he is sent to the bench with his fifth foul. He may very well be innocent. In super slow motion we may be able to see that no foul actually occurred, but if he slapped at the ball, the foul will likely be called.

The Fed has told us clearly what they will do. All one has to do is look at that same information they have and one will understand that no meaningful interest rate hike is on the horizon. If they do anything this year at all it will likely be a token move to test the market reaction.

The other interesting story in my world has been that oil has revisited its lows – and has once again bounced, but that isn’t as interesting so it won’t be discussed. As with the Fed and interest rates, the fascinating part of this story is the reason given. Wall Street is determined to make this about actual supply and demand for oil. They are now focusing on the amount of oil being stored. More people are storing oil today because futures markets indicate that the price will be much higher in a few months than they are now, but somehow in TV land this means that prices will be down. While this negative story is being fleshed out and everyday there is another negative oil story, the price of oil has already bounced back approximately 12 percent.

Oil revisited its low because oil is a commodity, and commodities have no fundamentals, no earnings and no intrinsic value. Securities are traded in the market based on two theories. One is fundamental analysis – what is a company actually worth; the other is technical analysis, which is the study of price movements. Technical analysis is not highly regarded outside of Wall Street because it has no intellectual underpinning. Prices don’t actually move in patterns, but humans are hard wired to see patterns even when no pattern exists. Technical analysis should not work, but it sometimes does because of the laws of self-fulfilling prophesy. Enough people think technical analysis works to make it work for short periods. There are many technical rules which have this attribute, but the one in question here is that lows must be “tested”. The stocks of companies have real fundamentals which often override technical mumbo jumbo, but technical analysis is all commodity traders have, so the lows are bound to be tested. There is no other reason why oil prices revisited their previous lows and are now seemingly on their way back up.

Sometimes it is good to not over-think things. Sometimes “it is what it is” is a valid answer. Interest rates are not going anywhere anytime soon, oil prices are going to go back up, and over the next two weekends we will see some mystery fouls called because a defender made that dreaded slapping move. It is what it is.

Chuck Osborne, CFA
Managing Director