14 Jun WAS YESTERDAY A DAY OF SIGNIFICANCE?
Was yesterday a day of significance? Oil advanced over 2% as several oil tankers were attacked in the Gulf of Oman. As widely noted, oil has plunged since sanctions were levied on Iran as inventories have surged. Many, including me, expected inventories to fall given these sanctions, the Venezuelan implosion, erratic shipments from both Nigeria and Libya, and flattening American production.
The EIA has commented about the massive disconnect between supplies and inventories stating last week inventories will be revised lower. Will this occur?
Bloomberg wrote yesterday investors have not been paying up for small caps since the end of 2014 and currently the Russell 2000 trades at a 32.3% discount to the S & P 500, more than one standard deviation below the average since 2008. This disparity is gargantuan and in my view unsustainable.
Bloomberg further writes more the vast majority of the oil companies in the Russell 2000 are trading more than one standard deviation below the norm.
Also reported yesterday, the DOJ announced that price is no longer the primary element in determining monopolistic on anti-trust behavior. For the past 30 years the regulatory entities have focused on price. The primary question was how will such mergers/company dominance impact innovation and the price paid by the consumer?
As widely accepted, we are the product of social media/technology companies. We are given a product for free but the real cost is our privacy and personal data.
In my view, this change by the DOJ is structural. It is a basis for potential antitrust litigation that will take years to resolve. The issue at hand is the massive amount of wealth that is concentrated in these social media/technology companies and the beginning of a regulatory onslaught on these firms which will impact revenues and cash flows.
As noted above, the Russell 2000 is trading at a 32.3% discount to the S & P 500, more than one standard deviation below the average since 2008. This disparity is uncommon and huge. Moreover, oil shares have been decimated, partially the result of rising inventories.
Will yesterday’s attack be of significance or just a one off event? Will there be massive rally in oil shares, the result of valuation differences between these shares and that of technology? Will oil inventories be radically revised lower to correct the disconnect between lower production and rising stores?
Change is the only certainty. The question at hand is what will be that change? I believe all have duped into a false sense of security that interest rates will never rise and passive indexing is the panacea of investing. Two of the most feared words on Wall Street is “Crowded Trade,” defined as everyone doing the same thing thus creating the inevitable sand pile that will collapse once one more grain of sand is put on top. The question is when that collapse will occur. How high can the pile go?
The Russell 2000 has been a massive underperformer since 2014, an underperformance that is close to a record for duration and extent.
Perhaps market historians will look back at yesterday and state that it was an inflection point similar to the one when Wachovia announced its major mortgage issues [June 2008] or when the Thai baht unexpectedly devalued that ushered in the LTCM fiasco [July 1997].
Last night the foreign markets were down. London was down 0.58%, Paris down 0.55% and Frankfurt down 0.89%. China was down 0.99%, Japan up 0.40% and Hang Sang down 0.65%.
The Dow should open moderately lower on geopolitical and trade tensions. The 10-year is up 8/32 to yield 2.07%.