Saturday, August 22, 2015

Is this the end? Stocks down 3% on Friday, 6% in 48 hours

Although I know little about the dynamics of stock prices I can read a chart as well as anyone else. The real truth is that over the past year stock prices have been static (some up and downs).  On August 22, 2014 the S&P 500 closed at 1,988, last night the market closed at 1970 a 0.1% drop over 12 months!  Hardly what I would call a massive correction -- lets not forget that "smart" investors are suppose to invest and forget for a few months -- churn is the enemy of the successful investor (ask Buffet).  Sill there is the past 48 hours and the breathless comments and worries -- is this the big one?

Yes Thursday and Friday were bad, but aside from weak oil prices, China going crazy trying to maintain an artificial market up (for no apparent good reasons) the place is more or less unchanged. There's always talks of war in Ukrain, Iran Syria... the usual trouble spots but nothing over the past few weeks justifies a 6% correction.  There is a certain uneasiness in the market, and in fact this 6% correction could be the perfect example of bad news being good -- insofar as it will be difficult for the Feds to raise interest rates when the market drops by 6% over rumours of a "possible thinking of maybe raising interest in some distant future".  

The worry with oil a $40/bbl is that it indicates a real global economic weakness -- its not a good sign!  The problem with low oil prices when production has been more or less steady for the past two years (but also where reserves are sky high) is troubling, especially since these low prices are occurring during America's "driving season".  America's consumption of oil is still rising (about 4% -- or twice its GDP), its the rest of the world that's not pulling its weight.  

For the markets the worry is a global shift in those who have money to those who don't -- a large and diffused group (aka the consumer) away from the producers and the lenders.  That's a massive issue for the market.  Because those who lost in the energy game here a well know individuals (or nations) and they will have to shift ressources -- maybe away from treasury market maybe from the stock market.  

The real issue for investors is where to put your money.  Would you buy bonds when interest rates are 'about to maybe go up" especially if the yields are as paltry as they are today!  No the best place to keep cash right now are the markets -- there is the markets the possibility of making a decent yield (if you invest in dividend yielding stocks).  Which brings us right back to China's crazy behaviour of the past few weeks.  The Shanghai market is still massively up for the past 12 months up from 2,240 to 3,209 today 24/8) but is now flat for the calendar year (01/15); so why not let the market correct a little -- is it because China's leaders just don't understand the reason for markets -- its just another way of transferring "creating" wealth.  The reason for the intervention is unclear, maybe they view all these issues inter-related; real estate prices, shadow lending and now a stock market that will not go up 100% per annum.  

At any rate, a panic seems premature, and maybe Monday saner heads will prevail, then again this could be the beginning of the end!

Update: Tuesday 25th of August:  So watching the pundits state that: "the sell off could be seen a mile away" just keeps on amazing me. My favorite is that the selloff was telegraphed to the market because the high yield bond market had decoupled from the market -- in January!  So this morning, looking at the futures we see the Dow & S&P500 futures in the +5% range -- taking us right back to Thursday's price.  If you had gone to a no wifi resort for four days and get back in the office this morning, the market has not moved one iota (well aside from the VIX 12 to 50 to 23)...


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