First, European Central Bank President Mario Draghi went before the European Parliament yesterday to proclaim the banking system sound and resilient. He said higher capital buffers and other things made the situation “very different from what it was in 2012” during the eurozone debt crisis. He also said the ECB “will not hesitate to act” further to combat economic weakness when it next meets on March 10.
Second, officials from Saudi Arabia and Russia met in Doha, Qatar, and said they would “freeze” oil production. Qatar and Venezuela said they will also join in the new output plan. The Saudi oil minister Ali Al-Naimi claimed the move would help limit “significant gyrations in prices” and lead to a “stable oil price.”
Rumors of policy action and short covering ahead of the three-day weekend for U.S. markets helped send the Dow Industrials up by more than 300 points Friday. Then they rose another 220 points or so today. But crude oil gave up all of its gains, suggesting the advance may have trouble sticking. Why?
|Will oil producers be able to stem the drop in oil prices?|
Well, let’s start with Draghi. What do you really expect the man to say? Like every central banker, treasury secretary, or finance minister facing a banking crisis in history, he’ll never admit if the system is rotting from beneath. That would only intensify the sell-offs in bank stocks, and even lead to depositor “runs on the bank.”
Just remember how former-Federal Reserve Chairman Ben Bernanke and former-Treasury Secretary Hank Paulson kept saying the housing and mortgage crises were “well-contained” back in the mid-2000s — even as they were starting to collapse behind the scenes. They couldn’t admit how bad things were because of the dire consequences of doing so.
As for the oil deal, there’s a lot less to it than meets the eye. For starters, both the Saudis and the Russians refused to cut production. They’re only halting further increases … not much of a pledge when you consider both countries are producing at record-high levels.
The deal is also conditional on other OPEC and non-OPEC nations joining in. But U.S. share producers aren’t bound by national or government policy. They’ll take advantage of any increase in prices to pump more to keep desperately needed cash coming in the door.
Not only that, but Iraq and Iran also aren’t party to the deal. That’s significant because Iraqi production just hit a record 4.35 million barrels per day last month, while Iran is planning to boost production and exports back to pre-sanction levels regardless of what the Saudis or Russians say.
|“Iraq and Iran also aren’t party to the deal.”|
Me? I’ll go back to what I’ve been saying for several months. Sharp, short-term rallies are even more common in bear markets than in bull ones. They tend to come after waterfall declines, start because of some policymaker response, and look very enticing on the surface.
But unless the underlying fundamentals change significantly for the better, you shouldn’t alter your investing strategy because of them. The better approach is to use them to unload long exposure you’ve been lugging around … or to re-load inverse ETF/put option positions … at better prices.
So what do you think? Is Draghi right, and the European banking system in decent shape? Or is he just saying whatever he has to in order to keep investors from panicking further? How about the oil deal? Is this a significant change, or just a bunch of sound and fury signifying nothing? Hit up the comment section and weigh in when you get a minute.
After several painful sessions for risk assets, we saw a late-day rally on Thursday. That carried through on Friday and in international markets on Monday when we were closed. So what do you see happening from here?
Reader Chuck B. said: “Major stock market bulls and bears happen on a fairly regular pattern — not exactly, but alternating to some degree. We should be due for a bear market after six years of the bull being in control. Play it roughly the reverse of how you played the bull, and you should come out fairly well.”
Reader Gordon said: “We keep looking in the rear-view mirror and think in cycles, charts, patterns and investing history. But the debt world has advanced greatly and as stated, the bull market has raged for some six years now. Maybe one should consider that, with all the debt and bad bank and government decisions, we could be looking at a prolonged nuclear bear market.”
Reader Michael said there are other factors to consider: “It seems there should be more analysis of demographics, sovereign debt, private and personal debt, and unfunded liabilities of city, county, state, and federal governments. The impacts indicate the need for de-leveraging no matter how much central bankers/governments attempt to avoid it.
“At the core is the demographics of now. Population growth begets growth and the reverse is also true — i.e., Japan.”
Finally, Reader F151 said: “The day of reckoning for the central bankers has finally arrived. Janet Yellen was totally befuddled last week before Congress. Her message was nonsensical. I almost feel sorry for her as she will be pilloried long before this is over.
“She is in way over her head, but I do not think Greenspan or Bernanke would do any better. She should resign and get out while she still has a shred of sanity. Obama has doubled our national debt to almost $20 trillion and as a result, there will be few options and things will be bad … very bad.”
I appreciate the comments. I tend to agree that the overhangs of government and private debt are major challenges here. Corporations have also been borrowing like mad to buy back stock and buy competitors. Plus, we’ve seen huge buildups in subprime auto lending, commercial real estate lending, and other risky subsectors of the finance industry.
We’ll see if stocks can overcome all of those obstacles for more than a few days. Personally, I remain skeptical. Whether you agree or disagree, I’d love to hear about it in the discussion section.
The home security firm ADT Corp. (ADT) is selling out — to Apollo Global Management (APO) for $6.9 billion. The private-equity firm is paying a 56% premium to where ADT was trading before news of the deal broke. Apollo already owns the Protection 1 security firm, and will fold ADT’s operations into that business.
China joined the chorus of countries claiming there’s much more they can do to stave off economic weakness. People’s Bank of China Governor Zhou Xiaochuan spoke out to defend the yuan currency, while the country’s premier, Li Keqiang, pointed to “a lot of tools in the box” that could be used to boost growth. I feel like I’ve seen this movie before, but I’m curious if you think they’re right — or if China’s economy is destined for weakness no matter what.
Supreme Court Justice Antonin Scalia died of natural causes over the weekend, and now the race is on to replace him. President Obama could choose to nominate a more liberal judge, but Republicans in Congress are vowing to fight any such nomination. Will Obama name a replacement anyway, and dare Congress to stand in the way? Or will a vacancy remain until the next president takes office? We shall see.
Uh oh. This Bloomberg opinion piece from Mohamed El-Erian used the “c” word to describe the banking sector chaos – “contained” in the headline and “containable” in the copy. El-Erian is a former Pimco bigwig, frequent CNBC guest, and the current chief economic adviser at insurance giant Allianz. I haven’t seen our current Federal Reserve chairman or Treasury secretary use that infamous term from the housing/mortgage crisis yet … but I’ll be watching!
So what do you think: Is the banking turmoil going to be “contained,” or are policymakers and analysts whistling past the graveyard (again)? Is China going to be able to jump-start growth effectively here? Will we see more private-equity takeovers like the ADT deal going forward? Or are tightening credit conditions going to put the kibosh on that business? Again, the comments section is a great outlet for your thoughts.
Until next time,
P.S. Asia is collapsing. Europe is falling apart. U.S. stocks look like they could crash and burn at any moment, without notice.
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