Panic may be a bit hyperbolic; but, as of Friday’s close, things were getting a bit goofy in the market. Of course, when this happens on the downside it is usually a good thing, signifying that we are a lot closer to a bottom than a top. This is really intriguing, since we are only down 3.7% from the very best level that the S&P 500 ever traded at (2079.47), and 3% of that drop occurred last week. As for the narrow, but often quoted, Dow Jones Industrial Average, it had its worst week since 2011. All in all, I will make the case that this is positive with one caveat that I will address at the end of this post
On The Plus Side
- Most would agree that a real correction (-10% or better) is in order after the run we’ve had the past 2 years (S&P 500 up over 50%). This would be expected and normal.
- Any euphoria bubbling under the surface has been dampened in the last month. Investors are back focusing on the downside; and, with every dollar drop in the price of crude, visions of 2008 begin to dance in the psyche of many. This is an overriding positive as it has, and continues to, keep a tons of money on the sidelines … ‘once burned, twice shy’.
- Finally, an examination of the underlying facts would argue against the extreme fear and pessimism that has built over the last couple of weeks.
This was the MarketWatch headline Friday evening, December 12, 2014. Published at the end of the Dow’s worst week in two years (S&P 500’s worst in 2.5 years). the VIX (Volatility) indicator spiked 68% in the last five trading sessions, ergo a ‘panic’ in my mind. The “4 reasons … “:
- Global growth slowing … this is a real puzzlement to me. No matter how often that the statistic, ‘the world is producing a million barrels a day more than we need’ is quoted, many continue to attribute it to economic slowdown rather than energy efficiency. The world does not need all that shale oil right now and the Saudis do not want to give up market share. Here is a little something from Tom Porcelli, Chief US Economist at Royal Bank of Canada to back this up. Unfortunately there was more in the interview where Porcelli delineated the size of the high-yield energy market. Energy high-yield was not a very big part of the market and CNBC cut it … too much good news. It is not global growth.
- High-yield pressure … carnage in the high yield market as investors begin to worry about heir riskier bets in energy. Yes, if prices stay here there will be bankruptcies and losses, but a lot of this debt will be restructured or taken out via acquisition by stronger partners. This is not the housing crisis.
- Russia Redux–Problems in Russia in 1998 (long-Term Capital Management) triggered a mini-crisis. We dealt with it then and will deal with Russia, or other sovereign crises as they arrive. My concern here is that Russia (Vlad), in light of the sanctions and collapse of oil, does something stupid a la lashing out like a wounded animal.
- Last, but not least, “Bank Exposure” Maybe this will be a problem for some of the more oil-centric regional banks. The table below (extracted from the article) prepared by BMO (Bank of Montreal) Capital Markets might shed some light on this issue. interestingly, the most systemically import bank on the list, Wells Fargo, does not seem to be hung out very far in the energy sector. To put this in perspective, the total loans outstanding in this report (including energy) at BOK and Cullen Frost, (the most energy exposed banks) represent only 2.7% of Well’s total loans outstanding.
Aside from this MarketWatch article, the media (Barron’s. Wall Street Journal, CNBC, New York Times business section) spent very little, or no time on Friday’s meltdown. I guess they are getting used to this stuff and that is complacency, which is never a good feature when it shows up in the market.
Anyway, tomorrow should be interesting.
What do you think?
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