18 Oct LIQUIDITY IS STILL AROUND ANNUAL LOWS
Many times I have commented about the lack of liquidity, primarily the result of regulatory fiat, trading mechanics and passive investing. Considerable attention has been focused on the liquidity issues of the repo market, liquidity that is being provided by the lender of last resort—the Federal Reserve.
Several times I have discussed the implosion of several high profile and prolific European (and now South Korean) money management firms, the result of liquidity issues. These names are synonymous to American names such as Doubleline and Blackstone.
Yesterday Bloomberg remarked that equity market liquidity is still hovering around annual lows. Wow!
I would like to comment about the performance of the S & P 500 Energy sector….horrible, horrific, career ending. The WSJ writes crude has dropped about 25% for the year but energy shares are down about 54%. Liquidity in the sector is virtually absent, essentially creating a vacuum.
Will this change? Are conditions as dour as a share prices suggests or is the environment in the energy sector the inverse of the “greater fool theory,” the prevailing theory that I believe exists in some parts of the technology sector?
It is widely accepted there is no geopolitical premium in oil prices. I ask should the premium be around the greatest in history given the total implosion of the 70 -100 year old geopolitical environment in the Middle East?
Moreover the leading Democratic candidate shares the same view as the President…leave the Middle East. Additionally all Democratic presidential candidates are advocating a ban for the exploration of oil.
I believe if any of the above continues to materialize oil supplies—which are already at the lowest since September 2007—could massively contract sending crude sharply higher.
Fanciful thinking? This is the first time in my 33 years of experience that geopolitical and macro-economic and security specific analysis is regarded as totally meaningless. It is my first-hand experience, when extremes are achieved the inverse occurs.
For what it is worth department, historically when there is a big shift in sentiment, all deny the possibility of yet another change. For example five years ago everyone believed oil would never trade lower than $90/barrel. Funds for exploration were readily available and to heck with any traditional financial metrics.
Today because of the last five years, and the greatest oil implosion in about 2 generations, confidence and capital is at a multigenerational low. Today psychology is abysmal, an outlook perhaps amplified by the change in information delivery. The psychology will change but the question is when.
Last night the foreign markets were mixed. London was up 0.19%, Paris down 0.26% and Frankfurt up 0.16%. China was down 1.32%, Japan up 0.18% and Hang Sang down 0.48%.
The Dow should open flat on mixed Chinese economic data and earnings. The 10-year is off 4/32 to yield 1.77%.