'These Are The Times That Try Men's Souls'

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by: Bill Kort

Thank you Thomas Paine and CNBC contributors Fred Imbert and Ryan Browne for the title and inspiration for this post. Paine's pamphlet "The American Crisis" penned during the Revolutionary War did indeed reflect dire times in our history. Meanwhile, CNBC's post-market post (Dow drops 200 points on worries about global economic growth-11/9/18) reflected on potential dire times in the midst of economic prosperity.

Key Points of the CNBC Post

  • "West Texas Intermediate futures fell 0.8 percent to $60.19 a barrel, after briefly breaking below $60 for the first time since March. They also fell further into bear-market territory, trading more than 20 percent below their 52-week high."

Oil prices have increasingly become the focus of the pundits, as the price weakness might signal a weakening of global economies. Oil prices for many have become a "canary in the coal mine". Any weakness in oil and they are willing to throw in the towel and predict a global economic retrenchment. The problem is that they are never willing to look at oversupply as the culprit (U.S. Oil Production Is Set To Soar Past 12 Million Bpd). The focus always moves to "global slowdown." Yet forecasts remain, although tempered by trade concerns, for oil demand growth.

"The IEA cut its estimate for global oil-demand growth for both 2018 and 2019 by about 110,000 barrels a day to 1.3 million and 1.4 million barrels a day respectively. The revision also reflected changes in the way the agency assesses Chinese consumption. Both global demand and supply are close to hitting 100 million barrels a day for the first time." (Source: Bloomberg, International Energy Agency)

We saw the market go into a tailspin in late 2015 and early 2016 for exactly the same reason. I wrote in March of 2016:

Oil prices - On its way to $20 (or lower) a month ago, West Texas Intermediate (WTI) closed this week just a smidgen under $40 per barrel. It was going to $20 because of two misconceptions: 1) world demand was down (especially China) and 2) supplies were growing. Ex. the new oil coming onto the market from Iran. Both appear wrong. World demand was up last year and it is estimated to be up in 2016. In fact, lower prices may have stimulated demand. According to the American Petroleum Institute (API), "Total petroleum deliveries, a measure of consumer demand, rose 2% in February from a year ago levels, to 19.8 million barrels per day. These were the highest deliveries in eight years. Total motor gasoline deliveries rose 5.2% from February 2015 to 9.1 million barrels per day and were the highest deliveries for that month on record." In this clip Chevron CEO John Watson discusses the reasoning behind his expectation that production will be dropping in the face of this increasing demand. Many have laid market weakness at the feet of falling oil and commodity prices, which they equate to weak demand and recessionary pressures. It continues to look to me like oversupply, which in the oil patch, may be in the process of righting itself. Of course, the bear case: this is a flash in the pan. ("After you get what you want, you don't want it")

Then There's China

  • "The weak Chinese economic data come as the U.S. and China engage in a trade spat that has been going on for most of the year. The two countries have slapped tariffs on billions of dollars worth of each other's goods as the U.S. seeks a better trade deal with China."

Ex the trade issues, this is another "…Deja vu all over again" moment from two years ago. It is likely this, too, will be settled with really little change in the two country's trade positions … just enough so the president can proclaim victory.

Then there is Fed policy

  • "These sharp losses (in the markets) have rekindled worries about a possible slowdown in the global economy, which come as the Federal Reserve looks to further tighten monetary policy. The Fed on Thursday decided to leave its benchmark interest rate unchanged, as was expected, but comments by the U.S. central bank suggested it was on course to continue hiking rates."

Two years ago the Fed had just begun the process of normalizing interest rates with a quarter point increase in the Fed funds rate (0.0 to .25% to .25 to .5%). For many, this was to be the end of the world … didn't happen.

December 31, 2016, the S&P 500 closed at 1,940. Friday, November 8, 2018, the S&P 500 closed at 2,781, up 43% in less than two years. The 2015/2016 correction was the last real correction that the market has experienced since the end of its recent run-up. The current market would appear to be correcting this run … not beginning a protracted bear phase.

Ergo, these should not be the times that try your soul, unless, of course, you are paying attention to the media.

What's your opinion?