|Dow||-111.97 to 17,068.87|
|S&P 500||-16.88 to 1,972.75|
|Nasdaq||-57.33 to 4,547.83|
|10-YR Yield||-.045 to 2.071%|
|Gold||-$10.90 to $1,196.80|
|Crude Oil||+$0.05 to $55.96|
Just when you thought it couldn’t get any worse in Russia, it did!
Overnight and early this morning, the Russian stock market collapsed another 15 percent. The Russian ruble plunged to a fresh all-time low, bringing year-to-date losses against the dollar to a whopping 50 percent.
Thanks to that massive capital flight (and a further decline of more than $3 a barrel in global oil prices), the Russian central bank was forced to jack interest rates to 17 percent from 10.5 percent overnight. That was the single-biggest rate move since the Long-Term Capital Management crisis in 1998, which I told you all about yesterday. Currency markets got so volatile that retail brokers like FXCM (FXCM, Weiss Ratings: C) either halted trading in the ruble or hiked transaction costs.
|The ruble’s fall has crossed the line from a headache to a full-blown crisis.|
It wasn’t just Russia, either. Venezuelan bonds collapsed further. Middle Eastern and South American stock markets got rocked. Heck, punch up a chart of the iShares MSCI Mexico Capped ETF (EWW). You’ll see that it just dropped 12 straight days in a row — losing more than 16 percent in the process!
Let’s call a spade a spade here folks. It’s a global crash. But does it mean the U.S. market is doomed?
Well, the energy sector here has certainly gotten shellacked. The Energy Select Sector SPDR Fund (XLE) started the summer up around $101. It traded as low as $72.51 today — a 28 percent plunge in just a few months! Many smaller energy producers have fared even worse, losing 70 percent, 80 percent, or more of their value.
But the Dow Jones Industrial Average is down just 900 points or so from its recent high. That’s only around 5 percent. The U.S. economic data has remained fairly robust, even as emerging markets like Russia and Venezuela are tumbling into recession — and developed, foreign economies like Japan, China, and Europe remain weak.
And let’s face it: The pain is getting bad enough that it’s hard to imagine a policy response is far off. When it was just our enemies and countries that don’t like us very much who were suffering, that was one thing. But the carnage has clearly spread to friendlier nations (Thailand, Turkey, Mexico, etc.) and other sectors of the capital markets (non-energy junk bonds, currencies more broadly). These crazy moves are also occurring right before another Federal Reserve meeting.
Is it so hard to imagine an unscheduled oil production cut by OPEC, possibly coordinated with non-OPEC nations like Russia? A Fed-ECB-BOJ, coordinated asset market intervention of some sort? Policymakers coming out and saying they’ve had it with the relentless rise in the dollar, which is now clearly having negative impacts across the capital markets (rather than just on oil)?
|“I’ve been nibbling on energy stocks and related investments into this waterfall decline.”|
All of that is why I’ve been nibbling on energy stocks and related investments into this waterfall decline — on a wide scale and only gradually. Heck, I’m even starting to look at emerging market debt from an opportunistic standpoint. That’s after hating on it and slamming it for the better part of the past two years!
Bottom line: There are big risks out there right now … but also major opportunities in beaten-down sectors and investments. So definitely respect the former, while not forgetting the potential profits from the latter.
What about your take? Have we reached a capitulation point here, and does that make this a good time to buy emerging markets and energy investments? Or is there more pain to come?
Do you think Russian President Vladimir Putin will now pivot back to the West as a result of all the financial pressure? Or will he get even more adversarial? Is it time for yet another global financial bailout from the Fed and its counterparts overseas? Or will it stand aside and let the meltdown continue? You know the drill — use the Money and Markets website to weigh in during these incredibly volatile times.
|Our Readers Speak|
With volatility surging in the energy markets — and emerging markets in general — many of you shared your thoughts about what’s going on … and what to do about it!
Reader Fred S. weighed in on the geopolitics behind the moves we’re seeing, saying: “It’s a political and economic squeeze by the Saudis and their Sunni counterparts against the Shias of Iran and Iraq. Plus, they want to hurt Russia for its support of Assad. If their political and economic will holds up, it could cause severe damage to many world economies.
“Russia is already selling their dollar holdings and soon many more may follow. It doesn’t seem like Russia can pay for their imports. Putin will not stand idly by and watch his economy collapse. There are too many players and too many scenarios so beware.”
Reader Ken discussed the ramifications for the energy and debt markets, saying: “The major concern is the junk bond market and its potential collapse! Understand that 30 percent of current market is financing the oil/gas industry. I suspect if there is a collapse in oil finance issues, the carnage will be significant.
“What is the solution: Output reductions, OPEC, higher prices, certainly not higher interest rates? Or is the outcome the price to be paid as a result of the Fed activities, and allowing OPEC to control price levels? Perhaps if free markets were allowed to work, perhaps the problem may not exist!”
Speaking of the Fed, Reader Lewis D. said he hopes they stay the heck out of this situation. His take: “God forbid the Fed should leap into the breach and corrupt financial markets even more than it already has! The reason all those high yield energy bonds are floating around in the first place is the Fed’s zero interest rate policy has driven investors to extreme lengths to find yield.
“They shouldn’t have bailed out LTCM (which got into trouble with money borrowed too cheaply thanks to the Fed) in the first place. As you pointed out, the real U.S. economy wasn’t damaged at all, just the speculators. Unfortunately, the only game plan the Fed seems to have is repeating its own mistakes, except bigger with every iteration.”
Reader Steven picked up on that theme too, saying: “What wasn’t mentioned in the article was the ramifications of the interest rate reduction and the money tsunami that intervened in the markets. Check your history. I am certain that you will find that both the Dot.com bust and the Housing Bubble that followed had their beginnings in the LCTM Bailout.”
Thanks for all your thoughts in these volatile times. Be sure to check out the rest of the comments out there, and add your own, at the website!
|Other Developments of the Day|
Horrible news out of Pakistan, where Taliban militants stormed a school in Peshawar and slaughtered more than 140 students and teachers. Six militants died in the attack, which reportedly involved indiscriminate shooting of children as young as 13 and 14.
We’re starting to see some of that M&A activity I was expecting in the energy patch. Repsol SA of Spain confirmed it would buy Talisman Energy (TLM, Weiss Ratings: C-) of Canada for $8.3 billion.
The deal will dramatically boost Repsol’s output and reserves. Moreover, it was done at a 56 percent premium to TLM’s closing price the day prior. Talk about a nice payout for anyone who bottom-fished in TLM shares!
Housing starts slipped 1.6 percent in November to a seasonally adjusted annual rate of 1.03 million units. Building permit issuance dropped 5.2 percent to 1.04 million.
Boy, was that a painful Chicago Bears game to watch last night! Given my wife is from the Windy City, I could hardly “bear” to watch. Let’s see if they ditch their underperforming coach in the off-season — something that could happen at many other NFL clubs as well. This USA Today story weighs in on which guys are in jeopardy.
Do you have any thoughts on these or other headlines out there? Then be sure to swing by the website and share them with your fellow investors.
Until next time,