Friday, January 8, 2016

Global Weakness Strikes The New Year

The year of 2015 took investors through a wild roller coaster ride of extreme volatility complete with extra screaming from the oil and gas industry. Many analysts labeled the past year as the end of the bull market that had benefitted from the overextension of selling after the crisis. Just about seven years after the start of the Great Recession, mood swings start to become evident once again. The beginning of the new year tells no different story. Despite stabilization today, the Dow Jones Industrial Average has already lost almost -5% for the year. Pent up global pressure once again mires any hope of U.S. equities lifting off ground zero. A combination of political and economic trepidations has compromised any short-term optimism that was present in the market. North Korea's claim of testing a hydrogen bomb contributed to a Chinese stock rout that sent tremors through the rest of the world. For the year, the S&P 500 is down -4.88%, the Euro STOXX 50 is down -5.90%, and the Shanghai Composite has sparked the plunge with losses of -9.97%, a number that has recovered with gains today.

As an impending result of the global weakness, crude oil prices have responded with more price cuts in a nihilistic fashion. China, the world's largest source of demand for fossil fuel, has hinted at further slowdowns with the weakness perceived by the stock market. From the supply side, gushing faucets of cheap crude continue unabetted with incentives to keep pumping looming for Saudi Arabia, Iran, and even some major shale producers. While Chinese weakness hurts U.S. oil and gas companies less, a stronger dollar against the world's currencies makes their gas more expensive for their buyers overseas. This could be why prices hover at all-time lows of $32 a barrel.


The blue lines representing a trendline and high volume levels don't spell out particularly good news for those who are long oil. The masses selling WTI have been noticeably large with volume numbers larger than those of 2015. Interestingly enough, the only periods of volume that are above the blue line represent bullish spikes. Three such spikes can be observed in February, April, and September on this chart. This calls into question the motives and sustainability of demand in the oil market (and for that matter, most commodity markets). A lot of money is rushing out of these core products creating gaps in the pricing mechanism. Gaps that typically lead to a stimulation of consumption spending when prices loom lower up until now. Despite extremely low gas prices, demand for gasoline has remained stable, and natural gas was just hurt by one of the warmest winters on the eastern seaboard. The truth is, this year's decision-making will be riddled with doubt and bearish speculation as a result of a mindset created seven years ago. Home and construction are on the rise, jobs are being created at an astounding rate (given the current rate of unemployment), and even auto sales have hit records, but commodities and prices have failed reflect that seemingly positive business conditions. There's something like a facade built around the economy, perhaps like one built around Greenspan's economy, but this time, investors and consumers can feel it. While much of the disturbances in the economy and the stock market can be attributed to global financial weakness, I think that we shouldn't discount a recession that mirrors the one about seven years after the Great Depression in 1937-1938. The re-recession was a puzzle to many great economists like Galbraith and Schumpeter. Now, it peeks my interest. While a direct parallel may be unrealistic, there are no doubt connections between the mindset of that time as well as the business conditions that surrounded it. Perhaps we can go back to this period to analyze potential connections between now and then.

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