Stocks rallied and oil prices fell on Tuesday after the big news before the market open that Saudi Arabia, Russia, Qatar, and Venezuela agreed to freeze oil production was met with a lacklustre market response.
First, the scoreboard:
- Dow: 16,194, +220, (+1.4%)
- S&P 500: 1,895, +31, (+1.6%)
- Nasdaq: 4,434, +97, (+2.2%)
- WTI crude oil: $29.10, -1%
Saudi Arabia, Russia, Qatar, and Venezuela agreed to freeze oil production. Not cut it, but at least keep it steady at near-record levels.
The market was unimpressed.
After oil prices had their 14th-largest one-day rally ever on Friday following headlines suggesting coordination on a price cut could be coming, the market reaction Tuesday was muted. “Buy the rumour, sell the news,” or so the old adage goes.
But of course aside from the market reaction there are the practical implications of this move which, to many analysts, are sort of whatever.
Analysts at Barclays wrote that, “these developments officialize what is already happening.” Which is to say that Venezuela, Qatar, and Russia were already going to be hard-pressed to grow oil production this year and so announcing a freeze is sort of head-faking the market into thinking they are doing something.
Julian Jessop at Capital Economics also noted that Iran is likely to increase oil production as sanctions against the country are lifted, which suggests that total global oil production could increase this year anyway. So really, nothing was accomplished.
Turning to the US oil markets, Ian Shepherdson at Pantheon Macro wrote that it seems the end may be near for US shale production — which grew about 15% a year when oil prices were at their peak — but just declined their year-ago levels earlier this month for the first time in four-and-a-half years.
“We don’t know how far U.S. shale production will now fall,” Shepherdson wrote. “But with U.S. crude oil inventories standing at about 60 days of consumption, nearly 20% above their long-term average, the outlook is bleak.”
Break Up The Banks
Neel Kashkari, the new president at the Minneapolis Federal Reserve, wants to break up the big banks.
In a speech Tuesday at the Brookings Institution — Kashkari’s first at Minneapolis Fed president — Kashkari said, “given the enormous costs that would be associated with another financial crisis and the lack of certainty about whether these new tools would be effective in dealing with one, I believe we must seriously consider bolder, transformational options.”
“Transformational options” like breaking the big banks up.
Kashkari said banks should be broken into, “smaller, less connected, less important entities” and the largest banks ought to be turned into, “public utilities by forcing them to hold so much capital that they virtually can’t fail.”
Of course, then they can’t really succeed, right?
Kashkari was in charge of the Treasurys TARP program in the wake of the financial crisis, and so he certainly got a very close look at the financial system and the stress this sector put on the entire US economy and its taxpayers. And it seems he is not loathe to repeat this experience.
Kaskahri added (emphasis mine):
Given the scale of job losses, home foreclosures, lost savings and costs to taxpayers, there is widespread agreement among elected leaders, regulators and Main Street that we must solve the problem of TBTF. We know markets make mistakes; that is unavoidable in an innovative economy. But these mistakes cannot be allowed to endanger the rest of the country. When roughly 1,000 savings and loans failed in the late 1980s, there was no risk of an economic collapse. When the technology bubble burst in 2000, it was very painful for Silicon Valley and for technology investors, but it did not represent a systemic risk to our economy. Large banks must similarly be able to make mistakes — even very big mistakes — without requiring taxpayer bailouts and without triggering widespread economic damage. That must be our goal.
And by coming out this strongly on an issue that, frankly, isn’t much discussed by current Fed officials, Kashkari continues the tradition of thought-provoking and conventional-wisdom-challenging commentary from the Minneapolis Fed.
Narayana Kocherlakota, who had served as Minneapolis Fed president, was in favour in negative interest rates in his final months in office and had been by far the most aggressive “dove” — or Fed official arguing for easier monetary policy — in his last couple years on the job.
Elsewhere in central banking news, former Fed chair Ben Bernanke explained why the Fed paying interest on excess reserves isn’t a “subsidy” to big US banks. Larry Summers — who was once considered for the top job at the Fed — came out against the $100 bill.
Who Knows: Stock Market Edition
“Our portfolio advice has been pretty horrendous lately,” writes Morgan Stanley’s chief equity strategist Adam Parker. “As my 90-year old Latin teacher used to tell the class in 1985, ‘son, you are in left field, without a glove, with the sun in your eyes.'”
In a note to clients on Monday, Parker admitted that his advice has been terrible this year.
“For those who follow our portfolio, we did quite well over the five years from 2011-2015,” Parker added. “But, our portfolio just had its worst month in 61 months in January, and things have not improved in February. The market is down more than we thought it would be. Our biggest sector bet has been financials (particularly credit cards). As an investor recently said to us at a conference, “I am doing a lot of things, just nothing with confidence.” Doing the opposite of what we recommended would have been better.”
This is refreshing!
Parker has long been one of the most mercurial strategists on Wall Street, writing earlier this year that he had no idea where the market was headed and telling investors last September that everything they thought was true is, in fact, worthless.
Citi’s Tobias Levkovich, meanwhile, found that everything investors thought would happen this year went the other way.
“In these contexts, it is not at all shocking to comprehend the level of consternation about portfolio positioning.”
Which sort of all goes to the theme we’ve ben hammering here on BI: Markets. The markets are very much unsettled and the outlook is cloudy at best but let’s admit it: things look bad. The actual economic data, particularly in the US, however, indicate that while things aren’t great, they are not terrible.
And the biggest question on everyone’s mind — “Are we heading for recession?” — looks very much like it will be answered with “No.” At least based on the received data so far.
Or as Dan Loeb wrote in his fourth quarter letter to investors: “This is a Wall Street recession.”
This year, Warren Buffett’s Berkshire Hathaway annual meeting will be streamed on Yahoo.
And while I very much enjoyed my weekend in Omaha last year, investors around the world will now be able to watch Buffett’s riveting 7-hour question-and-answer session with shareholders and journalists wherever they choose.
(Disclosure: I own a few Berkshire B shares so that I can attend the annual meeting. And while I have no plans to sell them or by more anytime soon, I guess that whole excuse for owning this stock is sort of moot.)
We’re reasonably confident that tens of thousands of Berkshire faithful will still flock to Omaha for the meeting, but once again, the internet makes amazing experiences possible for free. (I know, I know, there’s the cost of an internet connection and a computer and so on but you get the point.)
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