FYI | Jan 20 2016
By Peter Switzer, Switzer Super Report
After the Dow slumped over 500 points on Saturday morning, our time, we all had to be wondering: is this the start of a crash?
However, if you aren’t as negative as some, you could’ve been pondering: what’s going to turn this negative sentiment around?
Obviously, the possible hard landing for the Chinese economy is playing on the minds of those selling stocks right now. Making it all worse is the related fall in the oil price and the other commodities’ prices as well, which hits our resource-rich stock market in particular.
And we now have a double curve ball out of the US, which a few months ago was all about could the Fed raise rates too quickly and would this kill off the bull market? However, this is giving way to concerns that the US economy is slowing faster than expected under the weight of a rising greenback.
At the same time, Wall Street has produced the worst opening two weeks in history and facts like that don’t help a stock market that’s being slugged nearly daily because the list of good reasons to buy stocks are being swamped by better reasons to sell.
These, of course, are primarily short-term considerations, but I would argue that this market is being controlled by short-term views on stocks, which could provide great buying opportunities for long-term investors, provided this is not the start of a crash.
I will be clear on this, and I know it’s risky, but I have to nail my colours to the mast, but I think we’re in a correction phase, not a crash event.
So, what needs to happen to see selling give way to buying?
Hopefully, China could provide some good news tomorrow with a slew of data around GDP, retail, investment, etc. but be clear on this, if the numbers disappoint, then this sell off could worsen. Bad news could bring a Beijing response. That used to work to turnaround market confidence but lately the Chinese Government has lost a lot of its credibility.
That said, I think the preoccupation with China is excessive, which was a point that AMP’s Shane Oliver made on my Switzer program last Thursday. And this is what CommSec’s Craig James argues: “We believe that worries about the Chinese economy are over-done. The economy is rebalancing and evolving and growth pains must be expected as the process continues.”
Certainly some better economic data could easily change the market perceptions on China, so let’s hope good economic news comes sooner rather than later. I do think there is a preoccupation with older economic indicators, such as manufacturing, when data on the services sector should become more important.
Let’s go to oil and here the commentators/experts, who say the price goes lower, are matched by those who say the price is bottoming.
KLR Group’s John Gerdes told CNBC that oil prices aren’t far away from a significant spike. He’s forecasting a $US47 a barrel figure this year, which would be a 50% plus improvement in price!
Part of the current price problem is that Iran will soon be adding to supply but this has been known for some time. "These supply adjustments take many, many quarters. They take years. We're one year into a three-year adjustment process," said Gerdes, who is head of research at the KLR investment bank, which focuses on natural resources.
"The U.S. industry is effectively uneconomic at sub-$60 [per barrel] and we're sitting at $30."
I liked this analysis and also this from Gerdes about how when US companies find they can’t persist supplying oil at these low prices and they turn off their crude oil spigots, they aren’t easily turned back on!
"When you redeploy capital, that lag effect is in place again going the other direction."
And I also liked hearing that Warren Buffett, the great investor who has advised us to “be greedy when everyone is fearful”, has bought 5 million shares in an oil company called Phillips 66 and that’s a $400 million bet on the oil price eventually spiking!
On America, the weak economic data can’t be ignored but there might be an excessive preoccupation with manufacturing, which has to go off the boil when the greenback goes higher. It’s the services sector that I think is more important and you can’t ignore the job creation we've seen over 2015.
Those 292,000 Yanks, who got jobs in December, are going to be much better consumers than they were when they were on the dole! And some time this year, the income effects and lower cost effects of lower oil prices have to kick in. This could be a massive positive sleeper for the global economy and it perplexes me why we are so spooked about oil companies. Some will go broke but their businesses will be bought by others but just imagine if the oil price was $US150 a barrel, we’d be worried about cost-push inflation and, ultimately, a recession!
By the way, the US stock market is pricey and needs to come off or earnings have to go up to justify current share prices. The forward price-earnings ratio for the S&P 500 index is about 16.5, while the long-term average is 15.
When the economic stories improve, so will the earnings and commodity price outlooks and then we might see the over-suppliers of oil and other resources start a cutback process, which should have positive impacts on stock prices.
I know it is tempting to be influenced by big mouth experts, who tell us that it’s all over for stocks but I’m going to punt that the Federal Reserve has also done its homework on the US as well as the global economy before it started.
Of course, they can be wrong too, but I’d rather back these guys and their judgment rather than the pessimists, who have been tipping this for years and have been wrong for years.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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