Ok................so, is the equity headbanging going on right now in the global view the result of:
1. just plain old time to take some money and run after 7 years?
2. crude oil is a deflationary indicator for global growth?
3. or door #3........tis the old "s*%@ happens", don't try to understand why...a kinda group think from and for the big money
K............way simple perhaps.
One would think that eventually cheaper crude will equal cheaper input costs for some sectors involved in finished products. Now this doesn't mean the savings will be passed along, but in theory would be a profit for some sectors/companies. I don't recall that the energy sector downturn has that great of an impact upon employment numbers for all related......might be wrong about this.
Enough other thoughts are available regarding the above.........but, "I'm late, I'm late, for a very important date."
Thanks for your time.
Catch
Comments
Nos. 1 and 2 look correct to me.
Must go through the port and pick the worthy ones.
An explanation in my mind is that market trading is now sufficiently dominated by trading algorithms that only care about price movements which can be triggered by any number of factors - sentiment, change in fundamentals, etc. When they are all trying to front run each other up or down, it just exaggerates the movements. Normally, this results in a lot of volatility but occasionally it gathers enough momentum to snowball further and further in one direction or the other. There have been bear markets before this, so this kind of trading does not create bear markets but more price movements and faster direction changes.
The trigger in this case appears to be three things (does not mean they are necessarily valid economically or fundamentally just that enough people buy into it). Big investors and traders are always trying to create a model to fit the current situation and sometimes different pieces fall together to create a strong pull or push in one direction (even if the model is incorrect with respect to reality, perception is reality)
1. Oil/commodity prices. No one can really explain this type of plunge especially as a supply/demand curve except as a retroactive curve fit. No country or region went into recession or suffered some kind of economic collapse. But the default explanation is that this must be a collective sign that the world is going into a recession/depression. So money managers look for corroboration.
2. Negative outlook on corporate earnings. Corporations in the last few years have been masking consumer weakness (from stagnant wages) with financial engineering that made them look healthy when people mindlessly follow valuations. But this is not a sustainable strategy and they are running out of steam, especially in consumer space. The destruction of margins with eCommerce is making itself felt more and more. This supports a slowing economy model that props up sentiment in 1 above.
3. Possibility of money supply drying up. The Fed is not only going away from QE but now on the path to increasing rates. This tends to strengthen the dollar (which further affects crude prices and export margins). But there is a growing fear that this going to significantly withdraw money flow into equity markets that propped up the bull market for the last 7 years. Ironically, the less the chances of heading into a recession, higher the likelihood of this as the Fed continues in its path. So investors start to deleverage riskier assets in anticipation. This amplifies movements from 1 and 2 above.
So, we have a snowballing movement.
My current hypothesis is that this is going to take 6-12 months to unwind as all the corroborative indicators now pointing in one direction start to diverge and get noticed barring any contagion-caused collapse in the financial sector. Especially if the expected recession from front-running the indicators does not happen. Future fed hikes will actually help bolster that realization.
1. Oil prices going up will be taken as a positive indicator the economy is getting strong again. But this may just be technical trading. I think ever since the financial institutions started to get out of commodities trading en masse in 2012, coincidentally the beginning of the commodities downturn, it fundamentally changed the price setting/discovery process in commodities. Whether it was from increased scrutiny from regulators or the banks had perfect crystal balls to forsee a collapse of commodities (which is likely true if both happened and they were behind a lot of synthetic demand), I believe this has created a price reset in commodities not just a physical/supply demand issue. I don't think OPEC has the ability to limit supply to the level needed to compensate for this financial price reset and so it makes little sense for them to try now especially with the perception of a slowing economy. The destruction of fracking industry is a bonus for them. I suspect the new price of oil to reach and stay in the $40 range for a long time barring major wars or significant supply disruptions.
2. Lower oil prices should be good for the manufacturing industry so goes the old tenet based on an industrialized, transportation heavy infrastructure. But the industry has changed, all of the oil guzzling industry is in China where the costs have already been so low relative to retail prices that the effect of cheaper oil is not going to make much of a dent percentage-wise in the over-all costs. Besides, manufacture what without consumer demand picking up? Companies doing stock buy backs do not use more oil. When is the last time Clorox or P&G or any consumer staples company using a lot of commodity raw materials innovated anything in their product line? The only "innovation" has been newcomers like Method with fancy packaging catering to the "greener" crowd because the giants stagnated.
3. Tech innovation has devolved into the mind-numbing Snapchats and labor-busting/tax-evading Ubers and Air B-N-Bs for a business model. There is very little venture capital available for anything more complicated than apps. Drone and self-driving car technology is the only significant thing happening and a lot of it is happening without traditional venture capital and they have significant regulatory headwinds (for a good reason). 10 more startups all doing superficial iPhone apps for wearable technology (for the UnderArmor/Lululemon crowd) can raise $20M+ between them, yet a company wanting to do the more challenging and promising but riskier ingestable technology (things like small cameras in pills, self-implanting organ monitoring systems) that can revolutionize health care can't raise even $5M.
Cloud investments were a bust for venture funding. Even in BioTech which priced itself out of the market in the free flowing money period, decreasing IPO possibilities in a bear market will shutter a lot of them. The end of free money is going to hurt the tech sector.
Not to sound negative, this is actually good for the tech industry as all the superficial stuff gets flushed out and serious projects get attention but it will take a year or so for better things to start emerging. Recessions and near recessions are the best times for an entrepreneur to do a tech startup.
I also expect a lot of executive changes in big industry as they get rid of financial engineering CEOs and replace them with leaders capable of organically growing the company with investments. This is a good thing.
Today is an options expiration day and the down movement may be exaggerated by that. Next week will likely be weak as a follow up. After that is anyone's guess but overall I think this cleansing of the markets is good for the long run.