Copenhagen Climate Talks Possibly Sent the Market Higher

The S&P 500 hit a 14-month high overnight. The conventional wisdom is that two news events are responsible. This is probably wrong. But let’s look at both events anyway and see what happened.

The first is that Abu Dhabi extended a $10 billion in financing to debt-distressed Dubai. Hossanah! Remember, Dubai is not Lehman. It’s Bear Stearns. It’s merely the reminder that there are lot of leveraged investors in the world who’ve used borrowed money to buy assets that aren’t very productive. They’ll get theirs soon enough.

The second bullish item is that ExxonMobil (NYSE:XOM) made a US$41 billion all stock bid for Houston-based natural gas company XTO. This sent Exxon shares down 4.4%. Thus the Dow’s rally was a bit tepid (XOM is a Dow component).

By the way, we’ve probably mentioned it before, but it’s normal for the shares of the acquiring company to fall on an acquisition announcement. The shares of the company being acquired, obviously, usually rise to near the price per share indicated by the value of the bid. You can engage in this kind of arbitrage trading…if all you do is sit around at a desk all day and figure out who’s going to be acquired and who’s going to do the acquiring.

Exxon is either getting a bigger foot in the U.S. natural gas market or hedging against cap-and-trade legislation, or both. We vote for both. No one is in a better position to know about the constraints on global oil production and discovery of new reserves than a major company like Exxon. And Exxon has seen firsthand that unconventional natural gas can be a lucrative little market.

But are those two bits of news really enough to send the market higher? Probably not. Who knows why the market goes higher? It does what it does. There’s an alternative explanation.

The alternative explanation is that the Copenhagen climate talks look like they’re collapsing into confusion and President Obama’s legislative agenda is in tatters. The private sector absolutely loves this.

Mind you we’re not addressing any public policy issues here. We’re not that smart. But politics has an effect on markets and lately one of those effects has been a huge increase in uncertainty…uncertainty about the cost of carbon dioxide emissions…the cost of health insurance…the size of government deficits…and more regulation in all aspects of corporate and private life.

Good policy? Bad policy? Who knows? All we know is that the more uncertainty you introduce into the markets, the more conservative and defensive investors are going to get. It’s hard (and unwise) to make long-term plans when short-term laws and regulations are always changing. No wonder bond yields are so low. A near-nothing return on cash is still much safer than taking your chances in the equity market.

That’s not to say that a deal won’t come out of Copenhagen. Maybe the planet will be saved. Or maybe Copenhagen is the sell signal for global warming as a big idea/moral issue with which to bash the public. But either way, we reckon the stock market actually likes the idea that no climate deal is imminent and that healthcare legislation in the U.S. Senate can’t seem to get 60 votes.

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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5 Comments on "Copenhagen Climate Talks Possibly Sent the Market Higher"

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i wonder if the oil price will start going up if no agreement is made at copenhagen

The great hope in everything is that people and their plans, no matter how perfectly arranged, are never guaranteed – as per “best laid plans of mice and men” and all that. The Copenhagen conference, to me, is about governments inventing a tax – it could have just as well come under the banner of “the rich helping the poor” rather than saving the planet. The pressure is on (probably by no accident) as governments all at once indebted themselves with stimulus policy, which they will need to recoup in some palatable way. (saving the planet is all well and… Read more »
Drew Weeks

Have to agree with you Dan and for a change I have nothing further to add.

Jon Bain

Now that Gordo Brown has jumped on the climate bandwagon,
its sure to end up as another wolf in sheeps clothing.

Gernot Hassenpflug

Agreed with Dan. Just as IP and human-rights legislation work to invent fake property rights and then use force to appropriate real property from the owners of such, here again we have a forced process to obtain real produce from people while giving for free essentially as though having sold fake produce (=paper money) to others. The old mantra: Produce not equals cash not equals paper money. Turned around: free paper money + legislation = appropriation of produce.

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