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Are the enfants terrible hurting stocks going up?

Peter Switzer
6 April 2016

By Peter Switzer

Wall Street was in a positive mood overnight, with the Dow up over 100 points but the other indexes  (the S&P 500 and the Nasdaq) had bigger percentage rises — with comments from the Fed and a 5% rise in oil prices helping positivity. Meanwhile, markets have reacted more maturely to Fed minutes than we’ve seen recently, which might mean the ‘kids’ (or ‘enfants terrible’) might be growing up!

One thing I’ve learnt about stock markets and those who live off them is that there’ll always be excuses made for what the market does. And there’s an excessive reverence around the market’s conclusion about perceived reality and its ultimate reaction. And those who show the most reverence (I won’t name names) don’t ever seem to say things like I do, such as:

The market was mad when it sold off in early 2016.

  • The above sell off looks excessive.
  • Our banks are being unfairly beaten up.
  • Our housing sector won’t bring our banks down.
  • The oil price freeze in Doha on April 17 won’t happen, etc.

The latter one is a case in point and it will be interesting to see how this one plays out. It’s a classic case of where commentary is primarily speculative but it can move oil prices. US crude hit a 12-year low of $US27 a barrel in January but talk of a possible agreement between OPEC and non-OPEC suppliers of oil saw prices spike and global stock markets spiked along.

Then we started to hear from hitherto unheard of Saudi princes, Iranian oil officials and a coterie of figures you’d expect to be extras in a remake of that classic film Casablanca, all of whom seemed to move the oil price!

You can see why I have dug out the ‘enfants terrible’ French tag for pain-in-the neck children!

Yesterday, Reuters told us that a Kuwait OPEC governor and “two other sources” were putting their money on a freeze deal in Doha. Oil prices went higher and our stock market was up 21 points, despite Wall Street having a pretty negative lead. Who said talk was cheap?

Adding to the positives for oil was a big draw down on the USA’s domestic crude stockpiles. The end-result was a 4.9 million barrel fall in crude, when a Reuters poll tipped a rise of 3.2 million. That’s a pretty big miss by the so-called experts surveyed and, in simple terms, the bad news advocates looked to have been too bearish on oil.

"I think the market is more about the total change in (crude) inventories, rather than individual components," said Scott Shelton, energy broker with ICAP in Durham, North Carolina. "It's the first week of the second quarter and we have a net draw. That will force the bears to rethink their bearish balances for Q2." (CNBC)

This is a win for the good guys, who I cheekily believe are long-term investors who look for quality companies and stick with them. The bad guys (in what might possibly be unfair analysis) are the short-term traders, short-sellers, etc., who want to make money daily and don’t care who or what is collateral damage along the way.

Meanwhile, maturity has seemingly trumped (that word will always mean more after this presidential pre-selection campaign), with the latest Fed minutes not hurting stocks.

Wall Street did initially sell off, when the March minutes showed there was caution about raising rates next month but there were some voting members who wanted to go in April.  

Once upon a time, minutes such as these, which were more negative on overseas influences, could have resulted in a sell-off, now have seemingly taken the news in their stride.

Of course, there might be a greater belief that the Fed won’t rush to raise rates but I hope the Yanks eventually grow up and accept that if their economy is doing OK and their dollar has dropped, then they should be able to have a rate rise without selling off stocks like its akin to a wrist-cutting experience.

America needs to grow and grow up, which means that interest rates rise to stop inflation taking hold and to ensure that the growth lasts a longer time without it resulting in recession. Along the way, businesses and consumers hopefully will start to spend like its 1999! That was a good year (and Party like it’s 1999 wasn’t a bad song). If it happens, then the Yanks will have thrown off the GFC yoke of fear that’s holding back growth worldwide. And remember this, if economic growth doesn’t come out of all this quantitative easing or printing of money, then we’ll see a big, negative market reaction that will probably even see me bring out the dreaded R-word. (I mentioned it above but I think I got away with it!)

Given what some of the ‘kids’ are doing to stocks right now, maybe we need a new song called “Forever not young.”

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