Welcome. The content below is free to the public. It might be worth what you are paying for it. Having studied economics and being in finance for over two decades, I have learned that only one thing is certain - that almost nothing is certain. As we endeavor to come up with our best analysis of the world around us, the opportunities and risks, we have to try to overcome a myriad of issues including our own ignorance, biases and emotions. What follows are my attempts to overcome those obstacles. Welcome to my view - publishing Monday and Friday afternoons.
A quick "downdate" on the market today. I will try to put out quick thoughts when the market is moving around a lot or something interesting catches my attention.
Today, the markets opened down over 2%. As I type, the Dow is down 336 points and 2.06%, the S&P 500 is down 37 and 1.96%, the Nasdaq down 109 and 2.36% and the Russell 2000 down 22 and 2.13%. More importantly for subscribers, oil is plunging again as it seems determined to crack $20 per barrel for at least a moment in time.
This week we bought puts on the Russell 2000. Those are up substantially. It is not a bad idea to take the profits off right now, however, I wouldn't take more than that as technical and quantitative indicators (not magic, just sign posts) are pointing to a full on bear market across the board in the stock markets. With the Russell 2000 we are hitting that right now as the high the past 12 months was 1296. So, we are exactly at bear market territory on small caps right now.
In an article I published on MarketWatch on September 23rd, I declared that “The Bear Market Has Begun.” That article garnered a six figure readership (10-20k is normal) and hundreds of comments. I got the typical responses from indexers who never sell (which is a fine concept if your time frame really is 20 years) to traders who wanted to goose the market higher (it did rally in October) to emotional investors looking for answers they won’t accept (a rational answer doesn’t satisfy an irrational emotion) to conspiracy theories about the financial system, government, industry, aliens, whatever (I’m sure there are some, but not what you think, otherwise it wouldn’t be a conspiracy).
The point of the article was that we were unlikely to have a financial crash or an economic collapse, but that we would get a “normal bear market” with the S&P 500 falling around 30% from its high. I suggested that index could fall to as low as 1200, although I think 1600ish is much more likely.
In my annual letter to clients at my investment firm, I declare that a "Stealth Bear Market Crashes In" which discusses the reality that the stock market has been correcting from sector to sector for about a year already. Here is that letter:
In the past year the dire predictions of doomsayers and fear mongers have vacillated from annoying to deafening. While the negative group of peddlers might be right for enough of a moment to claim victory, in reality they won't be. Their calls for a financial collapse have been echoing since the last financial collapse. What is coming next is no collapse, it is a small and normal bear market which will be followed by something quite different than a collapse.
The baby boomers have been especially susceptible to the negative chatter by cable news, uninformed radio, the online pseudo-media and pretend research analysts. Over the past year, baby boomers have been pulling money out of the stock market on fear of the next collapse. Just last week, investors - mainly boomers - pulled more money out of the U.S. stock mutual funds than any seven day period in two-and-a-half years. http://goo.gl/se0eTR
As usual, I will keep my annual review short as I am working on a comprehensive annual letter due out in two weeks that will cover the two most important trends for the next THIRTY years (here are two hints: http://goo.gl/QDFQX1 and http://goo.gl/ixJqS7). I have been reading everybody else's reviews and will link several below with brief thoughts about each.
In general, I believe that 2015 will go down as the year that momentum traders and machines completely took over the stock market as baby boomers emotionally sold anything that wasn't a large cap stock. This is resulting in lower demand for stocks with the exception of the largest companies. The result is that price extremes for securities are now get even more extreme because momentum traders can push prices around with ease. And momentum works both ways. Lows become priced-for-bankruptcy lows even for companies in little to no danger of going under. Highs go even higher despite silly valuations.
I wrote about the Stampedes of the Momentum Traders several weeks ago. Something to keep in mind is that eventually, momentum has to reverse. It is very likely that many of the stocks that got pummeled in 2015 could be top performers in 2016. It is also very possible that some of the mega-cap names that have held up the market indexes will get knocked off of their perches. It is more important now to be a stock picker than every before.
At the recent OPEC meeting, Saudi Arabia decided to double down on their strategy to pump as much oil as they can in the short run. What is being missed here is who their real target is. While shale drillers get all the attention from Americentric investors, the reality is there is a lot more at play here. As I demonstrated a few weeks ago, deep water drillers and Canadian oil sands are at far more long-term risk than shale drillers due to their high cost capex requirements and a need for plays to be profitable for very long periods to be economic.
More importantly than companies that are feeling financial pain are countries that are feeling economic pain. Nations such as Iran, Iraq and Russia desperately need oil prices to be near $100/barrel. Libya, Algeria, Nigeria and Venezuela among others need much higher oil prices to make ends come close to meeting. Only Saudi Arabia and other nations of the Gulf Cooperation Council States can take these low prices much longer.
What really gets missed in this oil collapse is that Saudi Arabia's drilling policy is a defacto economic war on Iran and Russia, as well as, a shot across the bow of both Iraq and Venezuela who both have histories of non-compliance with OPEC limits. The economic war in Iran is based upon a sincere hatred for the country and feeling threatened by them. Saudi Arabia has clear justification to feel threatened as Iran backed terrorists are knocking on Saudi Arabia's southern door from Yemen, on top of, a long list of historical transgressions.
I know that this weekend most folks are shopping, buying Christmas trees and wondering how they ate so much on Thanksgiving. But this weekend is also the lead up to the most important month in finance and economics in years.
We are about to enter a month that is typically good for the stock market, but this time might not be. We have a pivotal OPEC meeting on December 4th that will determine their course of action with oil production. Then, on December 16th, the Federal Reserve, led by Janet Yellen is likely to raise interest rates for the first time since before the financial crisis.
In 2015 we saw a lot of stocks get annihilated as market leadership narrowed. Hedge fund darlings were flipped from running higher to getting pummeled. Biotech stocks got pilloried and Hillaried. Energy names were the big story though, as most fell in share price, many were crushed and some went to zero. As measured by the SPDR Select Energy ETF (XLE) the industry is down over 30% from its high. Interestingly, the 50 day moving average has started to turn up. A blip? A head fake? Or, is something else going on?
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