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The stock market sell off is excessive!

Peter Switzer
12 January 2016

By Peter Switzer

There is only one good piece of news that I’ve seen that makes me believe stock markets are going over-the-top with this current sell off. And that’s the fact that our 110-point fall yesterday on the S&P/ASX 200 index ended up being a 58.6-drop.

To be quite frank, I think the sell off is excessive but a market is what it is and right now the sellers are trumping the buyers. However, I do suspect that a lot of smarties look at the data flow, make a judgment call on how the market will respond, they could join in the selling but when they see the stock they like at a much better price, they buy in again.

Why do they do that? They know or suspect that this sell off is excessive — maybe not for the short-term but possibly from a three-month or even longer timeframe.

The three biggest drivers of this current market mess are China’s apparent slowdown, the price of oil, which hit a 12-year low going under $US31 a barrel and oversupply tactics by big commodity producers, such as Saudi Arabia, Vale, BHP and Rio.

On China, the economy is slowing but it looks like a drop in growth from 7% to 6.5%, which makes these fears about China look excessive.

But there is also a shift in the country’s sources of growth from manufacturing and infrastructure spending to services businesses that have a smaller demand for resources.

Because demand is weaker worldwide because of China and other economies struggling with the post-GFC implications, big resource suppliers have increased supply to lower prices to hurt smaller, high cost producers.

However, the death toll of these businesses has not escalated but their share prices and those of the big suppliers have headed south.

The world has ignored the great income effects of the lower price of oil but instead has got stressed out at the impacts on profits of the businesses in the energy space.

I’m hoping the lower cost of oil, petrol or gasoline and the income effects actually start to help economies and companies this year and we see a turnaround in the preoccupation of how energy companies are hurt by lower prices.

If oil prices were spiking, we’d be stressed out about a looming recession driven by higher costs, lower profits, a need to cut costs, namely jobs, and the scary impact of consumers having to pay a large outlay for their vital fuel!

So, why aren’t we cheering, waiting for the low energy cost economic boom? 

Well, it’s complicated with concerns that some big resource companies carrying a lot of debt in a dropping price environment could hurt bank balance sheets. That’s one worry and there are others, such as how strong is the US economy and what might the Fed do with interest rates this year?

But in all these concerns the market ignored the 292,000 jobs created in the US in December, which I think deserved a lot more respect from the market than it achieved, with Wall Street first going up but then selling off.

That was excessive negativity and I suspect in a few months time, I’ll be able to prove it was.

Earnings season starts in the US this week and I’m hoping that there could be a circuit breaker on the way but it is only a hope.

Negativity has the upper hand but it won’t last forever and the fact that buyers come in when we oversell is keeping me cautiously positive.

A positive close on Wall Street today would be a nice start to turning this all around but ahead of the close I can’t see any news overnight that could make that happen apart from my great argument against the excessiveness of this sell off.

 

 

 

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