"Greece, a small and insignificant part of the European economy as a whole and plunging oil prices have weighed on global markets, in the background there is still the pending asset purchases from the ECB. Should you worry? No. Should you invest more in the same quality companies at lower prices? Yes. The markets have bounced a little after their drubbing yesterday."
To market, to market to buy a fat pig. It is not often that you see days where stocks sell off that heavily around the world, the reason given was falling oil prices. Of course energy stocks, which have been beaten up already in the last quarter of last year saw little respite as WTI Crude oil fell below 50 Dollars a barrel, the worst level in over half a decade. Phew. The energy segment as a whole on Wall Street last evening fell 4 percent, blue chips and the broader market were down over a percent and three quarters, with tech stocks down over one and a half percent. I am not too sure about you, when I am paying less for gasoline (petrol as we call it in these parts), I am just guessing that it get spent elsewhere.
At the beginning of October, less than 100 days ago, there was this article titled Oil Prices Fall, and the Global Economy Wins, note that the oil price was above 90 Dollars a barrel. Since then, another 40 Dollars have been shaved off of the oil price. Almost everything is dependent on the price of transportation. Another point worth making is that whilst the general consumer in the US would benefit from deep cuts in the gasoline price, as much as 1 percent of GDP, the much lower spend by energy producers on exploration (cutting back capex aggressively at this point) is as much as 0.9 percent of GDP. For the month of December, oil prices were down 19 percent. That is simply mind blowing.
My best guess is that with the incredible ride over nearly a decade to achieve closer to energy independence in the US, lower energy prices, seriously lower energy prices could reverse some of that marginal production, no doubt it has already. Notwithstanding the lower oil prices through to November, one of the champions of American oil independence from the AEI (American Enterprise Institute), Prof. Mark Perry put together these charts: My top ten energy charts of the year for 2014. With such a huge rise in US onshore production and 87 percent of all energy consumed in the US being locally produced, no wonder the lights have dimmed for the bigger producers with less diversified economies. With US imports plunging, the debate has turned to potentially exporting, the US exporting oil, something that has not been allowed for nearly 40 years now. If you are old enough to remember the 1973 oil embargo on the US from the Middle Eastern producers, then you will know why.
The other obvious losers with lower energy prices are the exploratory companies, the companies that rent out and sell equipment to the oil and gas producers. More pressing for the companies that have invested heavily in reducing reliance on fossil fuels have been the alternative energy companies. When consumers are faced with higher prices of energy, they would make choices, buy smaller vehicles, use public transport, and so on, meaning that demand would drop. I have no doubt that technological improvements with regards to efficiencies are likely to lead to lower fossil fuel prices. Natural gas is the key one here, being cleaner and more abundant in North America, the focus is likely to remain there. Ironically the alternatives, the likes of solar and wind, need higher mainstream energy prices for people to switch.
Back to the local market quickly, it was exceptionally ugly yesterday. A selloff as bad as this not seen, wait for it, since the dark days of the financial crisis in November of 2008. The local market lost nearly 4 percent on the day, down a whopping 1687 points for the all share. Banks lost 4.5 percent, resources as a whole down 4.5 percent, thew only winners in amongst those were the gold shares. General retail down 2.5 percent, industrials down three and one third of a percent. Why the rout? I can understand why resources took tap, Sasol in particular was hammered.
It was not all about oil. You would think that sliding oil prices are a good thing for consumer stocks. Whilst the US economy has looked strong, the European economy has remained stodgy, what is new? A lower than anticipated inflation read in Germany raised fears that sliding energy prices could see the dreaded deflationary fears returning in Europe, the real focus for the time being are the elections looming in Greece. January the 25th is the date that you should pencil in.
The word Grexit again has emerged, the left leaning party that wants to put an end to "German led austerity" as they put it, are polling high. Whether or not the party would attract enough support from Greek people tired with austerity (no matter how necessary), I am not 100 percent sure. It is not a case of the other European countries not "caring" about Greece exiting (taxpayers in those countries would lose billions), I am guessing that there is a certain amount of fatigue. Check this NYT story -> Euro Countries Take Tough Line Toward Greece. If you need more, read this FT article: Greece should not play chicken with the euro.
Greece, a small and insignificant part of the European economy as a whole and plunging oil prices have weighed on global markets, in the background there is still the pending asset purchases from the ECB. Should you worry? No. Should you invest more in the same quality companies at lower prices? Yes. The markets have bounced a little after their drubbing yesterday, perhaps a little realisation that whilst South Africa might not be the best investment destination (I received a very despondent email overnight from a generally upbeat optimist), many South African companies are very well run, have superb talents and are growing their businesses in places that are growing. One still has access to these businesses locally of course.
Company corner snippets
Not too much to report here today, I am sorry to say!
Things we are reading, we think that you should read them too
WTF? Really? How is it possible that this could happen? The WSJ (subscription only) reports Morgan Stanley Fires Employee Over Client-Data Leak.
In this piece via the "Common sense" blog, a WSJ piece from Jason Zweig from the end of last year titled Lessons From a Year of Market Surprises is a simple line Humans don't want accuracy; they want reassurance.
From Statista, a piece by Felix Richter Phablets See Jump in Popularity This Holiday Season in which you see the bigger screens (5 to 6.9 inches) have cannibalised tablet sales.
The aforementioned Wealth of Common Sense blog divulged the obvious, The Danger of One Year Performance Numbers. Exactly the point, last might have been good for x or y or z asset class, in the end it depends what you are looking for as an investor.
Home again, home again, jiggety-jog. Stocks are sharply higher here in Joburg, nowhere near however in getting back the heavy losses from yesterday. Last day alone here for me, my colleagues are streaming back!
Sasha Naryshkine, Byron Lotter and Michael Treherne
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