Let’s correct a fallacy that is being trumpeted by whatever financial commentator your hear.
Cratering oil prices are not sending stocks down. The global recession is sending everything lower except bond prices, because large investors are looking to preserve wealth in US treasuries.
Crude is the canary in the coal mine for economic growth. The Saudi’s are not trying to break the backs of US frackers. The House of Saud is trying to hold on to power by keeping money coming into the country. They can handle $10 oil, since they still make a profit on it.
The Saudi’s have a meaningful war going on with Yemen that they are losing (but you won’t hear about that in the US media).
The Arab population is restless and we could see a renewal of an Arab Spring in the country as power has passed to a younger generation of leadership. These GenXers have never worked for a living, were educated overseas and have little need for the Muslim religion and its radical elements. This has a ringing truth to France in the early 1800s.
As I said late last year, Saudi Arabia’s implosion with its currency cratering while fermenting unrest will be a bigger story than China in 2016. It’s just no one in the West is writing about us losing an ally in the Middle East just yet.
Crude oil prices are a by-product of a cratering global economy, which takes down valuations of stocks as price/earnings ratios fall. That’s what we are facing today, not the tail wagging the dog.
Large US investors are at a loss to find a bottom in stocks. Every run up in equities is met with wholesale selling. Rumor buying in Twitter yesterday sent stock up 12% only to be shot down by yours truly as false, and the stock fell.
Big money from all over the globe is piling into US treasuries. The 10-year note is back to The Beatles invasion levels at 1.964% yield and falling.
The 540+ point cratering Wednesday on the Dow mid-morning felt like capitulation, as the index bounced higher, but its does not appear to be a bottom as futures are down triple digits Thursday. I am seeing some green on the screen in Europe off of China injecting $60 billion to buoy its markets, which did not help its equity markets.
All this puts the Dow Jones index off 10.4% for the year, the S%P is down 10% and the Nasdaq fell 11.7% (if you take the closing prices on Dec 31, 2015 and not the depressed opening prices in January).
All this worry, as Washington sends out its message that the US economy is getting stronger. Tell that to the small investor who sees creeping inflation everyday and no salary increase to speak of at the beginning of the year.
As I wrote last month, Janet Yellen hiking the Fed Funds Rate target to 0.5% was wrong-headed and the market is making her pay, now.
The reason we did not see an instant market reaction to the hike was Wall St.’s insatiable appetite to window-dress their returns at year’s end. They always run stocks and bonds up in the last 10 days, so the books look good for bonus season.
As soon as the calendar flipped to 2016, it was sell, sell, sell.