Whats driving the market lower today: European softness, Grexit, Microsoft miss, Cat comments, or something else entirely?
Often, the most accurate answer is we don’t know . . .
Look Out Below, _____ edition!
January 27, 2015 8:58am by Barry Ritholtz
This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client. References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers Please see disclosures here: https://ritholtzwealth.com/blog-disclosures/
What's been said:
Discussions found on the web:Posted Under
Previous Post
10 Tuesday AM ReadsNext Post
The Shrinking American Middle Class
I’m sure it’s just a matter of time before “investors” realize that the horrible Q4 earnings to date, coupled with the terrible durable goods orders, means no more interest rate rise (not there was ever seriously going to be one) and that QE4 is now more likely in 2016. So this news is incredibly bullish for the “markets”.
We must remember that no matter what, “markets” must not be allowed to go down.
Greece is too small, overplayed. Russia’s downfall, not over yet, will get worse as Russian billionaires are leaving Putin as he surrounds himself with tough guys…
.
Overall, seems to be on earnings. S&P is rich, for a while, on any measures. Oil will head lower before it rallies. UAE wants to kill shale oil. You haven’t lose that much money yet to surrender … they’ll keep oil below $50 as long as it take to discourage anyone from investing billions in oil rigs. So far, only oil experimented massive earnings revisions. Materials, not much. Banks, despite lower NIM ahead and foreign exposure, saw earnings beeing revised… higher (!) since Dec 31. Foreign exposure companies, not much revision as bottom up guys think lower gasoline prices will drive consumption higher (guess what, gasoline is a component of consumption…).
.
So more revisions ahead for oil will hurt (sector corrected 25% while the commodity dropped 50% and investors still expect oil to bounce back). Financials will experimente lower revisions on FX and lower NIM, not to mention trading revenue trend. Materials, should follow energy path.
.
All in all, revisions while the maket is trading at a very high forward P/E level…
Actually, if you do the math, you’ll be shocked to find the % of GDP that rises in the S&P 500 have accounted for in recent years.
I have seen a lot of people that think that falling oil prices are good for the economy because consumers see a drop in e.g. gasoline prices. They say “it’s like a taxcut”. Yes, it’s good for consumers (See the Michigan Consumer Sentiment Index, it went parabolic in the last months).
But falling gasoline prices also mean:
– lower sales tax revenues for nearly all US state governments. Brace yourself for higher taxes & lay offs of government workers.
– The oilproducers have borrowed money & issued bonds to finance all their activities. With oil at ~ $ 90 to $ 100 those companies were able to meet their financial obligations but with oil at ~ $ 50 those producers are being squeezed on 2 sides. Lower revenues on the one hand and higher interest rates on the other hand. Those higher interest rates are part of the (bank-)loan agreement. i.e. lower cash flow means that banks can increase the interest rates charged.
And that forces companies to cut costs where ever they can. So, the oilproducers will be forced to lay off workers as well. To top it off we see a rising USD.
And then people are surprised to see CAT’s bearish comments ? And people are still hoping for solid economic growth ?
http://jugglingdynamite.com/2015/01/27/when-it-rains-is-pours-weak-demand-hitting-earnings/
Totally agreed … US GDP and S&P500 are two different animals.
.
Lower Oil = good for the GDP, bad for the S&P500 (Energy profits, lower Capex).
.
Similarly :
Stronger Dollar = Good for GDP, bad fort he S&P500 (foreign profits = 35 to 40% of S&P500).
.
We have both … so if you are excited about the US economy, be overweight the USD, but underweight the S&P.
1) If drivers spend less on gas, and more one something else that is a wash for sales taxes.
2) What percentage, exactly, of balance sheets won’t support those debt payments? And if there are any are they just going to stand there?
3) Companies are ALWAYS cutting costs. Stock prices have tripled during a rampant paring since ’08
Anyone who was surprised by CAT’s announcement doesn’t know there’s less drilling equipment investment (good for drillers & miners cash flow) and higher dollar (temporary) and isn’t reading their weekly updates.
– I still see consumers trying to reduce their debt burden and then lower gasoline prices certainly do help. And then they not too willing to spend more on other things.
– A higher USD is “temporary” ? I don’t know what you consider to be “temporary” but I see the USD & Yen go (MUCH) higher against the e.g. Euro. E.g. a EUR/USD of 0.80 or perhaps 0.50.
Bein a net importer of oil the cut in prices mean that we are sending half as much money abroad as we otherwise would have done. No matter how much you torture the numbers that has to be a good thing.
No. Because a shrinking outflow of USDs also means that foreigners can buy fewer T-bonds. And that puts extra upward pressure on US interest rates.
We don’t need foreigners to buy T-bonds. That is what the Fed is for.
Typically gas taxes in places I’ve lived were based on cents per gallon rather than a percentage of cost.
In those cases it doesn’t matter what the price is. If consumption doesn’t fall, revenue doesn’t fall, and lower prices should not reduce consumption.
See: http://www.urban.org/UploadedPDF/413286-reforming-state-gas-tax.pdf
“The federal government and all states tax gasoline purchases. At the federal level and in all but a few states the gas tax is a per-unit tax, based on the number of gallons purchased and not a percentage of purchase price. Thus, the total tax paid at the pump does not change as gasoline prices rise, increasing only if drivers buy more gas or lawmakers raise the tax rate.”
Great time to travel abroad–U.S. Dollar up against many other currencies–may finally be able to get back at the Germans for taking over American National Parks in 2008!!!!
Yup, Italy in the fall for me. Bring on parity.
Absurd that some argue this is bad for the economy. I filled up yesterday at 1.99 in Maryland. How can you tell me that extra 25 dollars in my pocket or savings is bad? Besides, where are the cracks in the financial system? It’s been months. I hear of nobody going down. I cry no tears for commodity speculators and their enablers, anyway.
Another thing. Isn’t energy a huge expense for most any corporation? Especially those that transport people or things?
Economy and S&P500 are two different thing. While you shop in Italy, and Italians stay home, retail will certainly suffer, as it did in December. While lower gasoline prices should boost sentiment, helping consumption in the long run, it will hurt Energy sector revenue in the S&P500. Same thing can be said of the dollar, while a strong dollar benefit consumption, it will hurt companies overseas’ sales.
If you add gasoline and strong USD, you have a GDP boost, but a profit recession in sight.
Profit recessions occur in maturing expansions.
Great question!
CAT told us what most already know that there are problems internationally “We expect world economic growth to only improve modestly in 2015. The relatively slow growth in the world economy and continued weakness in commodity prices — particularly oil, copper, coal and iron ore — are expected to be negative for our sales.” This seems like a big move for old news.
Perhaps there is some inside news in the US government that only our wealthy government bureaucrats and their backers have access to like an interest rate hike is imminent. CBO forecast does project higher rates so if this is a sure thing then look out below!
http://blogs.wsj.com/economics/2015/01/26/behind-the-cbos-forecast-visions-of-the-3rd-longest-expansion-in-u-s-history/
Economic growth has already improved at a far higher clip than they know. A big reason why earnings are no longer generating the revenue is because its being spent. Typical maturing expansion. Upwardly revising those 2010-14 GDP coming soon!!!!!
Fabulous news this month for the US economy….two decades from now.
http://www.pewresearch.org/fact-tank/2015/01/16/this-year-millennials-will-overtake-baby-boomers/
The key information here is that young immigrants are swelling the ranks of the millennial generation so that they will outnumber baby boomers by the end of this year. This is very good news for Social Security, Medicare, and the stock market a couple of decades from now when I will be in my first decade of retirement as there will be a decent sized cohort in their 40s and 50s which is a peak productivity time.
Now all we have to do is get to that promised land without a great depression or world war interfering along the way..
Honestly – today’s reaction was baked into the cake. And as it happens, weeks ago.
(Although as a heads up, that upcoming “bucket” in our projections is the result of what we call an echo, which will run from late January into mid-February. Echoes are the result of our use of historic stock price data in our model as the base reference points from which we make projections into the future, with the outcome of potentially skewing off those projections from the actual trajectory of stock prices by several percent while the echo lasts. We have ways of dealing with the echo effect to regain our model’s typical accuracy, but given its short duration, we’re not going to bother with it in this round.)
lol, there was no “durable” goods disappointment. Understand the flaws inside “durable goods” reports and why they vary. How were earnings a “disappointment”, literally how?