The VIX has topped the 21.5 ceiling, and it did it rather quickly. Currently, it is just above 22, as it tracks the major indices on yet another down day. Clearly, the market is not listening to my argument about the economic fundamentals not warranting such a precipitous drop in the major indices. Well, there is not much I can do about that, other than to keep arguing the economic fundamentals do not warrant such a precipitous drop in the major indices.
Last week, the breathless media focused on Ebola (rightfully so), a weak Europe, a weak China, and a rising US dollar as reasons for the market decline. The good news about US employment, US exports, and corporate earnings got some time, sure, but the breadth of coverage focused on giving reasons for the market decline, which, of course feeds the fear about the market decline.
Okay, so that is what it is, and people clamor for explanations when the world is topsy-turvy and the market world has been upside down and all around for long enough now to freak out more than a few people, so the breathless media gives its market what it wants – gobs of explanation.
Yet, facts are facts, and as I have written many times, unless there is some institutional breakdown, such as we saw in 2008, or there is a global calamity (real or otherwise), such as what we saw with the Fukushima nuclear disaster in 2011 (real) or the nutcases in the US Congress threatening to default on US debt (otherwise), the economic and market fundamentals will ultimately win out.
So, as to the weakness in Europe and China, two of the biggies of last week’s deluge of reasons why the market was falling …
- China’s export and import performance in September easily beat forecasts, with imports showing unexpected buoyancy, helping to ease concerns about deteriorating domestic demand in the world’s second-biggest economy.
- Europe is weak. But you could have said that at almost any time over the past several decades. And at only 13 percent of our export market, a soft Europe won’t bring down the U.S. — or the world economy. And the NAFTA countries of Canada and Mexico — which are growing — absorb one-third of our exports.
China’s month-to-month economic data is up and down, which one should expect with an economy growing at an accelerated pace of 7.5% annually. Heck even with the US growing at 3% (or less) per year, the month-to-month economic data is up and down. Europe will come around, in time, but, as pointed out, it is not pivotal to a strong US economy. As to the rising US dollar, well, that tells us the US economy is doing well, and folks have faith in the country as a whole.
Ultimately, though, if you want to understand where the market truly is and where it is going, look to the most basic market fundamental, the one fundamental that matters more than any other – earnings.
- Profits, the mother’s milk of stocks and the economy, continue to rise at about 5 percent a year. The first 30 companies in the most recent third-quarter S&P reports have generated a 15 percent earnings gain.
The breathless media has given short shrift to the earnings reported so far, but the above gives you an idea of what has been happening. Remember as well that Alcoa, Pepsi-Cola and Costco all reported stellar earnings and profit in that group of 30 companies.
Alcoa speaks to a rising industrial market, specifically auto and planes. Pepsi-Cola speaks to discretionary spending on a global scale and Costco speaks to both discretionary and necessary spending on a large scale. All three point to healthy consumer demand and consumer spending, which, fundamentally speaking, is about to get better, a whole lot better, if the price of gasoline means anything to the US and global consumer. BTW, it does.
- National average gasoline prices are down to $3.24, with a lot of states below $3. That’s about a $70 billion tax cut for motorists.
The above is fundamentally good news because the only entities negatively affected by lower gasoline prices are the producers of gasoline – the oil companies and the oil-rich countries that are the OPEC cartel that have for years fixed the price of oil at a high level. Greed has changed all that.
Funny how it works, but greed is the reason oil is dropping and will continue to drop for, well, maybe a long time.
- Saudi Arabia is quietly telling the oil market it would be comfortable with much lower oil prices for an extended period, a sharp shift in policy that may be aimed at slowing the expansion of rival producers including those in the U.S. shale patch.
When US oil companies discovered shale oil and fracking, the game changed. The US is now the largest oil producer in the world and it is just about to step it up on the world stage (Congress will eliminate restrictions on exporting both oil and natural gas after the election), which means OPEC and Russia, along with other independent producers, will all be fighting for market share.
Fighting for market share means keeping your clients happy or they find a cheaper supplier, which means a price war is coming because if the Saudis don’t cut their production, no one will. The other “poorer” members of OPEC cannot economically afford to cut production to achieve higher pricing (They need the Saudis to do it). Russia is in the same boat. If it cuts production (translation = major loss of revenue), it might have a revolution on its hands.
As I write, light-sweet crude is below $84 and Brent is not far behind at $89. As well, RBOB, the futures price of gasoline dropped from 2.52 last week to 2.25 this morning. AAA (Triple A) is reporting a national average price of $3.19 and it is suggesting that the US could soon see a national average below 3$.
A quick look at the market and I see the Russell 2000 (RUT) has turned to the green and decently so (after hitting a low of 1046), while the Dow, S&P 500, and the NASDAQ all are fighting to get to the green. This portends a potential bottom, as the RUT is an indicator for both up and down market movement.
Just one more thing … The VIX has also dropped below the scary ceiling of 21.5. Just sayin’ …
Trade in the day; invest in your life …
