The Fire Sale Behind the Dismal 2016 Stock Market

In October last year the Financial Times ran a seemingly innocuous story on the investment management industry. FT said some major fees and money under management were going down. It was because oil producing nations were tapping into their wealth funds to cover their loss of export earnings. Oil was still holding around the US$50 mark at that time.

That was painful — but bearable for most of them.

But with oil falling under $US30 a barrel, it’s led to a major sell off in US and global stocks. You don’t sell what you want in times like these. You sell what you have. The oil producers have cranked up a fire sale of assets for cash.

The ASX is just following the US’s lead down.

This is why I’m not worried about recession in the US or Australia despite the share market decline in both countries from the start of the year.

There’s a difference between the stock market and the real economy.

Today’s Markets and Money will explain why…

Capital controls for this one time boom state

Azerbaijan might be the perfect case in point. It just put a 20% tax on transactions that remove cash from the country.

It’s trying to stop the further collapse of its currency. Its central bank reserves are down two thirds over the last years, according to the FT. That’s thanks to the oil price collapse.

It’s not alone. Bloomberg reported last week:

Across the Middle East, central Asia and Latin America, governments are tapping reserves accumulated when oil prices were high.

Petrodollar-stocked state wealth funds are an influential force in global finance, accounting for 5 percent to 10 percent of assets. Their selloff is seen reaching $75 billion in equities and $110 billion in bonds, according to JPMorgan Chase Bank.’

However, according to Bloomberg, there is one exception to this among oil producers. That’s Norway.

The government there can afford to live off the cash flow coming in from its US$780 billion portfolio of stocks, bonds and real estate.

It doesn’t have to sell a thing. Unlike a lot of petro-states, the government of Norway doesn’t squander its oil wealth on propping up corrupt and authoritarian regimes.

Unlike Australia, it doesn’t funnel most of its mineral wealth into buying and selling houses.

It invests it for the future. Smart move.

However, the Norwegians do have one problem, like the rest of OPEC. The tanker that just arrived into Europe. That’s because competition for world’s oil market is hot, hot, hot right now…

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‘Liquid American Freedom’

A US tanker carrying American oil docked in France last week after leaving Texas about four weeks ago.

It’s the first one to sail from the US after the American export ban was lifted. It was lifted in December after 40 years.

The US House of energy and commerce dubbed the cargo ‘Liquid American Freedom’. Perhaps Cheap as Chips might have been a better name. Because American shale is going to keep oil low — and it may even go lower. There’s both good and bad news in that.

Let’s take a look at the bad first…

Bad news for these stocks

You probably don’t even need me to tell you. Any stock associated with the energy industry is getting clobbered right now.

Woodside Petroleum [ASX: WPL] flagged a possible US$1.2 billion asset write down last week. It cut its expectations for the oil price down.

Woodside is now trading at the lowest price since 2005.

BHP [ASX: BHP] took a US$7.2 billion writedown on 15 January on its onshore US oil and gas division. It was the second impairment in six months.

And as my colleague Greg Canavan noted yesterday, Origin Energy [ASX:ORG] now trades at $3.50. That’s down from $13.50 in June 2015.

But there is an upside to all this…

The most bullish development in years

Of course, as long as you don’t own these stocks, there’s actually a very positive angle to their troubles.

The same is true for all the oil and gas producers. It indicates one thing: incredibly cheap energy.

This is extremely bullish for the world. The economy is built on energy.

One reason for the prodigious comeback in the US since 2009 is the cheap industrial energy that firms can now tap.

For example, it was a major reason why Aussie company Incitec Pivot [ASX:IPL] invested $1 billion several years ago building an ammonia plant in the US — and not Australia.

Here’s what the Australian Financial Review wrote in September 2015:

Gas, the key feedstock accounting for 75 per cent of the plant’s operating costs, was fetching $US9 per mmbtu when the investment was committed.

The company spent two years studying the long-term supply potential of shale gas that is now fuelling a US manufacturing renaissance.

‘Incitec was betting on gas falling to about $US6 thanks to revolutionary horizontal drilling flooding the US with gas…

‘[T]he company gained a “first mover” advantage by recognising the “dislocation” created by the US shale gas revolution.’

The savings for consumers are huge across the board.

An article in The Guardian suggests that every penny that gasoline prices decline is equal to $1 billion in savings for American consumers.

That’s why I see the drawdown in shares so far this year as a stock market issue, not an economic one. The average US consumer probably doesn’t even know what’s happening on Wall Street.

What matters for them is that employment is strong and ‘gas’ is going at prices not seen in over a decade. That makes a major downturn seem unlikely to me.

In fact the trends in the energy market are stoking the complete opposite. Sure, energy firms and countries are hurting. But there are two side to every trade.

Go here to find out which sectors will take the gain.

Best wishes,
Callum Newman

Ed Note: This article was first published in Money Morning.

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Callum Newman

Callum Newman

Callum Newman is the editor of Markets and Money and Associate Editor of Cycles, Trends and Forecasts. He also hosts Markets and Money Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to Markets and Money here.

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