Wall Street threw quite a party earlier this week. Stock averages pushed up to the top of their recent range, in large part propelled by crude oil and energy stocks.
That rally, in turn, stemmed from optimism that Russia and Saudi Arabia will reach a consensus on an oil-production freeze at this weekend’s meeting in Doha, Qatar. There is also some talk floating around about improved Chinese demand, due to yet another round of government stimulus, and about gradually declining global production.
So should you jump on the bandwagon and throw caution to the wind? I don’t think so. Because the major negative turns in the credit and economic cycles that began last summer don’t just stem from the meltdown in the energy sector. Far from it.
Instead, the easy-money cycle from 2009 to 2015 inflated a wide-ranging round of bubbles in many, many assets. It also incentivized massive malinvestment and crazy corporate behavior, from the biggest boom in M&A ever … to a record surge in debt-funded stock buybacks … to junky IPOs of wildly overvalued technology-sector "unicorns" … and more. The implications for you?
First, even if oil prices continue to stabilize, it won’t have any impact on the deflating value of tech unicorns. For instance, the Financial Times just reported that valuations are plunging for many private companies around Silicon Valley as the money flood dries up.
Investors, including hedge and mutual funds, sank money in 25% fewer companies and committed 40% fewer dollars when they financed tech startups in the fourth quarter of 2015 than they did just one quarter earlier. That’s fueling a surge in layoffs, and prompting a flood of office space to hit the subleasing market.
|Even if oil prices continue to stabilize, it won’t do any favors for the deflating commercial real estate market.|
Second, even if oil prices continue to stabilize, it won’t do any favors for the deflating commercial real estate market. The Wall Street Journal reported just this week that one of the most visible of New York’s "super-rich towers" is in big trouble. Specifically, the developer of the luxury One57 tower in midtown Manhattan has been forced to give up on a plan to lease 38 unsold units as apartments.
It already failed in an effort to lease units on one floor last year. It also failed in another attempt to sell all 38 units in one bundle in the fall. Now it’s going to attempt to sell the units as condos that start at $3.45 million … undercutting prices of previously sold units. That’s just the latest of many signs that the real estate bubble is beginning to leak air.
Third, even if oil prices continue to stabilize, it won’t help the deteriorating auto sector. Consider how dealers are now starting to lease many more USED cars in addition to NEW ones. That’s designed to make older vehicles more affordable to cash-strapped buyers than they would be with standard, used-car loans. But it’s something you rarely see on older vehicles, at least not at these volumes.
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Why would dealers resort to that step? Because the auto bubble is also bursting. A record number of off-lease and other used cars are starting to flood the market in a wave that’s forecast to get bigger each year through 2018.
Sales also missed forecasts by a country mile in March, and Manheim Consulting reported that used-car prices just fell for the third month in a row. Result: You can expect new-car manufacturers to resort to even-larger, profit-crushing incentives as industry conditions deteriorate.
So sure, the energy market caught a break here. But does that mean the world’s credit concerns are cured? That it’s all rainbows and unicorns from here on out? No way!
Even if the oil and gas crisis were to be solved overnight, it wouldn’t help fix any of those other problems. That has major implications for your investing strategies. So make sure you catch my new, blockbuster documentary "The Unseen Hand" for more details.
Until next time,