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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.
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?
Today the price of WTI crude oil rose 3.19%. Normally that would be a hugely bullish sign for oil, however, last week the price dropped 8%. With driving season well behind us and existing wells still pumping out oil, it will take two things to happen before oil prices rise and hold at a higher range. The first thing is on the way. The second, the Saudi's control when that happens. Before we get into what needs to happen for higher oil prices, let's take a look at what the market looks like.
Over the course of this year I saw something in markets that early on I couldn't explain. I suspected that there was something different with market structure that was dangerous but I didn't know exactly what. I now mostly know what is going on.
Starting back in the 2nd quarter I started using a phrase, the "networked traders" to describe what was happening with certain stocks. It started in energy as companies with billions in assets saw their share prices pushed down as if oil and gas would stay cheap forever and that they were on the verge of bankruptcy. While some energy companies are on the verge of bankruptcy, most aren't.
Since spring, people have been obsessing about whether or not the Federal Reserve will raise interest rates this year. While I don't think gradually raising rates to 1% over a year or so is a big deal, markets treat it like is monumental.
For the record, I think Janet and The Feds have been looking for cover to raise interest rates all year. With this past week's very good - not great - employment number, it looks like there will indeed be an interest rate hike this December, albeit small, and maybe, just maybe, accompanied by a small quantitative easing to smooth volatility and support liquidity.
For about a year now I've been talking about the broad market being in a topping process. Here's another chart that speaks to the same issue:
We've had a brief discussion about whether we are at the end of a secular bear market or the beginning of a secular bull market. Well, the answer will be found in the next big correction. If we have in fact started a new cyclical bear market which I signaled about a month ago on MarketWatch, then we simply need to watch the bottom of it to know where things stand.
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