Why The Market Really Sold Off Last Week
Josh Brown at the Reformed Broker had a post last Thursday titled Why Did The Stock Market Sell Off Today?. It is a very clever and funny post that plays off the biases of various media. A sampling:
Wall Street Journal: Tensions in Ukraine and the Crimean peninsula
Yahoo Finance: Russians
Fox Business: Obamacare
CNBC: It didn’t sell off at all, it was actually a reverse rally
Forbes: Taxes are too high
Huffington Post: Taxes are too low
Fox News: Gay marriage
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Bloomberg TV: The opposite of whatever CNBC said.
Buried near the bottom of the list is Josh’s own take: More sellers than buyers. That’s a phrase that was taught to me a long time ago by an old friend and market veteran from Austin, TX and it is as true today as it was when I first heard it. Of course, there really aren’t more sellers than buyers (or vice versa when the market goes up) but the urgency felt by each on any given day does move the price of assets until they once again balance. What Josh so comically points out is that we all come to this market party with our own set of biases and we see market movements within that prism. I am as guilty as anyone else but at least I am aware of my biases and try to see things as clearly as possible.
The emphasis by so many on the “crisis” in the Ukraine as a potential cause of seller urgency last week strikes me as a bit overwrought. Considering the state of American education, I would be willing to wager anyone that the vast majority of investors can’t even locate Ukraine on a map much less cite a coherent case why the Crimea returning to Russian rule constitutes a valid reason to sell US stocks. Russia is obviously important to commodity markets, particularly energy, and I suppose the imposition of sanctions and the consequent reduction in oil and gas supplies might be a reason to fret but the oil market isn’t exactly undersupplied right now. Inventory rose by 6 million barrels last week and sits at a 25 year high. And despite Putin’s czarist fantasies the price of the stuff fell pretty sharply last week. Part of that may have been a response to the Obama administration’s decision to do a “test” release of 5 million barrels from the SPR last week, which was either a coincidence or the administration’s feeble attempt at a shot across Russia’s bow.
I can’t help but wonder though if the US might aim the SPR at Russia and hit itself in the shale. I am skeptical that the US could engineer a big drop in the price of oil with the SPR anyway – other than temporarily – but even assuming we could, lower oil prices would probably be frowned upon as much in North Dakota as the Kremlin. With quite a lot of recent growth due to the booming oil and gas industry, driving down the price of oil – a positive if it was long term – in the short term would likely have negative economic consequences for the US. It would have the added benefit of ticking off the mad mullahs in Iran but it would also hit whatever allies we have left in the Middle East and I’m not sure we want to be whacking that particular hornet’s nest right now.
Another idea finding new footing in the midst of the Russian mess is that of allowing the export of natural gas. Republicans and Democrats with campaign contributors who would benefit are talking up the strategic geopolitical aspect of exporting some of the shale gas bubble to Europe as a way to reduce the stranglehold Russia has over gas supplies there. Even assuming we had the capacity to do so today – which we don’t – the idea that we can get natural gas to Europe for anywhere close to the price Russia can get it there through pipelines – which just happen to criss cross Ukraine by the way and might explain Putin’s unease at not having his man in Kiev – is ridiculous. I’m a free trade kind of guy so I really don’t have any problem with allowing gas producers to export the fruits of their fracking but the tactical or strategic benefit is nil. Put this one in the category of never letting a crisis go to waste when you can use it as an excuse to reward campaign contributors.
The other prominent explanation for the selloff last week was the continued angst regarding Chinese growth. The Yuan continued its downward drift last week and China announced yesterday that they were widening the band within which the Yuan is allowed to trade. They couched the announcement in terms of continuing reforms that will eventually allow the Yuan to float freely but I suspect it is more a case of expanding the band to correspond with the reality of the market. The Chinese shadow banking system is coming apart at the seams which can be seen quite clearly in the rapidly falling price of copper which has been a popular form of collateral for US Dollar loans in China. A wider band for the Yuan is an expression of stress regardless of what the Chinese mandarins have to say. Jeff Snider has been on this for a while and a more comprehensive explanation can be seen here.
China is most certainly growing slower than it has in the recent past but that is as much a function of the state of the global economy outside China as it is an expression of internal problems – of which they have plenty. And while more sellers than buyers is always the only explanation for a sell off in anything, the reason for seller urgency last week was, I think, mostly a reflection of continued weak economic statistics around the world, particularly the US. It continues to appear to me that the world is slouching toward deflation despite the best efforts of the Fed. It is tempting to point to rallying bonds last week as evidence of a flight to safety but the falling US dollar belies that explanation. About all the economic bulls could point to last week was a slight uptick in retail sales that was only as good as it was because the last two months got revised down. Most everything else pointed in the downward facing dog direction.
The final word about last week’s sell off is that it means basically nothing and the reasons for it are unfathomable since we can’t possibly know what millions of traders were thinking when they hit the sell button. It means nothing because it was a minor blip and the speculation that has been a hallmark of this market for some time continues. Just last week, Puerto Rico was able to float $3.5 billion in new bonds quite easily despite being in debt up to its Cerro de Punta. The bonds were priced at a discount at around 93 but quickly traded up to par before settling back to end the week around 95. That isn’t a sign that Puerto Rico has turned the corner as much as it is a testament to the lure of 8% yields in a yield starved world. Quantitative easing was intended to get people to take more risk and the Fed has gotten its wish in spades. One can’t help but wonder what kind of urgency sellers will feel when it all comes to an end and at what price their anxiety will be eased.
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