What’s really driving this rally?

Wednesday, 24 April 2019
Adelaide, Australia
By Bernd Struben

  • The higher it goes…the further it can fall
  • Sell high buy low
  • ‘O Little Town of Trumplehem?’

You’ve probably heard the phrase, ‘bad news is good news’ used to describe stock markets before.

The phenomenon really came into its own following the GFC. And in our increasingly globalised financial system it could be here to stay.

The phrase stems from the fact that disappointing economic figures often see stocks head higher. That’s because stock markets and even national economies have become highly dependent on central bank intervention.

When economic growth is faltering it signals more easy money ahead from the world’s central banks. And there’s nothing like cheap money to spur investor interest in stocks.

The US Federal Reserve isn’t the only player in this game. But with the US dollar still dominating world trade transactions, it is the most important one. And ever since the Fed backed off on its plans for as many as two rate rises this year, stock markets have been on a tear.

How much of a tear?

Just have a look at the year-to-date chart of the S&P 500 below:

chart image
Source: Google Finance
Click to enlarge

Overnight the S&P 500 closed at a new record high. The index is now up 19.9% from its 3 January low…and it’s only April.

The latest rally in US stocks was ostensibly driven by better than expected earnings reports. That may be true. But I write ‘ostensibly’ for a reason.

Ask yourself this. How do you reckon the S&P 500 would perform if the US Fed announced it was raising interest rates by a full 1.0% this year? I imagine that even with stellar earnings reports we’d see a big fall.

Closer to home the ASX 200 surpassed its 10-year high earlier this morning. The index is now up 15.0% in 2019. The latest tailwinds come from lower than expected inflation data. That’s good news because it ups the odds of a rate cut from the Reserve Bank of Australia.

In a twist on the ‘bad news is good news’ mantra, rising energy prices are also a boon for the stock market. Remember, we’re talking about the index here, not individual stocks.

Surging oil prices saw Aussie energy stocks gain 2.4% yesterday. That helped lift the index 1.0%.

Crude oil is now at its highest price since October. And Donald Trump — no fan of pricey energy — is copping the blame. But I believe it’s also Trump who’ll pull the plug on oil’s four month rally and send the price into another tailspin.

More after the markets…


Overnight, the Dow Jones Industrial Average closed up 145.34 points, or 0.55%.

The S&P 500 closed up 25.71 points, or 0.88%.

In Europe the Euro Stoxx 50 index finished up 4.62 points, or 0.13%. Meanwhile, the FTSE 100 gained 0.85%, and Germany’s DAX closed up 13.12 points, or 0.11%.

In Asian markets Japan’s Nikkei 225 is down 95.88 points, or 0.43%. China’s CSI 300 is down 0.45%.

In Australia, the S&P/ASX 200 is up 58.19 points, or 0.92%.

On the commodities markets, West Texas Intermediate crude oil is US$65.97 per barrel. Brent crude is US$74.17 per barrel.

Turning to gold, the yellow metal is trading for US$1,270.94 (AU$1,791.82) per troy ounce. Silver is US$14.82 (AU$20.89) per troy ounce.

One bitcoin is worth US$5,544.38.

The Aussie dollar is worth 70.93 US cents.

The higher it goes…the further it can fall

The crude oil market is one of the most interesting in the world.

That’s because you have immensely powerful players — individuals, corporations and nations — manipulating the market at every level. Some try to keep the price artificially high. Others attempt to bring it back to earth. And some use oil for economic warfare.

Donald Trump — arguably one of the most interesting leaders in the world — plays a pivotal role in this game. With conflicting goals, his actions can send the price of oil sharply higher or lower…depending on how the market reads it.

Trump’s latest surprise was to suspend the oil purchase waivers on Iranian oil. Those waivers allowed nations like India, Turkey and China to keep buying Iranian oil without being hit with US sanctions.

But commencing on 2 May, previously exempted nations will face US sanctions if they’re caught out buying oil from Iran.

Trump is still hoping to force Iran back to the bargaining table for a better deal on their nuclear ambitions. That may be a long way off. But in the meantime his decision emboldened the oil bulls to drive oil prices higher.

From Bloomberg:

The oil market just can’t seem to figure out Donald Trump’s Iran policy.

Crude prices in London hit their highest in half a year Monday after the president surprised investors by announcing the end of waivers that let some countries buy Iranian crude, following weeks of speculation the waivers might be at least partially extended…

“It’s almost like this administration likes to kick over the anthill and watch everyone scurry around,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “They are difficult to read, and you’ve maybe gotten a certain amount of wishful thinking from people in the market.”

Wishful thinking is a dangerous pastime in the investing world.

WTI crude has enjoyed a 55% rally since its low of US$42.53 on 24 December last year. Investors who went long then have reason to celebrate. But the way I read these tea leaves, oil’s bull run looks to be on its last legs.

With WTI at US$65.97 per barrel, some of the biggest beneficiaries are US shale producers. Most shale producers are profitable above US$50 per barrel. At current prices we’re likely to see a production ramp up from the booming US oil producers.

The US is already on the cusp of becoming a net energy exporter. And the American Petroleum Institute reported that crude inventories increased by 6.9 million barrels last week. That figure once again beat analyst expectations of a 1.3 million barrel increase.

To put that in perspective, Iran’s oil exports have already fallen to some 1 million barrels per day this month. An amount that Russia or the Saudis could easily make up for.

This, of course, is Trump’s plan. Here’s the tweet he sent on Monday:

chart image
Source: Twitter
Click to enlarge

Saudi Arabia hasn’t officially stated that it will make up for any lost Iranian supply. But the two nations are fierce regional rivals.

The Saudis also depend on the US for vital military support. And the royals still owe Trump a favour for his lack of action over the killing of journalist Jamal Khashoggi inside Saudi Arabia’s embassy in Turkey on 2 October last year.

That date — not coincidentally, I believe — is just one day before oil peaked at US$76.41 on 3 October.

Then there are the cash strapped Russians. They’ve previously said they’re happy with oil as low as US$50 per barrel. And Vladimir Putin is still hoping to mend fences with the US as well.

All said, I expect crude to tumble 25-30% by the end of June. That’s when new oil pledges by OPEC+ could follow hot on the heels of supply spikes in the US.

The oil bulls have done well over the past four months. But the bears’ time looks to be coming soon.

Sell high buy low

Speaking of betting against the price of oil, this type of investing upends the usual mantra of ‘buy low and sell high’. Instead the idea when you’re shorting oil — or any commodities or stocks — is to sell high and buy low.

With the ASX 200 at 10-year highs and the S&P 500 at record highs, most of the profitable trades this year have been the more traditional ‘long’ trades. That’s where you buy shares in a stock and hope to sell them for a big gain.

But as veteran stock trader Murray Dawes writes in his premium trading service, Alpha Wave Trader:

Stocks and markets don’t always go up.

They also spend time falling. Bear markets are unavoidable. If you want to trade, then you must accept that stocks and markets go down.’

So far this year, most of Murray’s trade recommendations have been long. But his patented ‘slingshot’ trading method also gives his subscribers the change to profit from falling stocks and crashing markets.

The idea is that you need never sit on the sidelines. Bull market or bear market, Murray’s custom trading strategy can keep you in the action.

The doors for new members (up to 100) are briefly open. To find out if Alpha Wave Trader is right for you, just go here.

Finally, here’s the latest from The Australian Tribune:

‘O Little Town of Trumplehem?’

Trumpville. Donaldtown. Trumplehem…

The Israelis haven’t yet narrowed down their choice for the name of a new settlement on the Golan Heights. But they have decided to name it after US President Donald Trump.

The unexpected honour comes as an expression of gratitude from the Israeli’s following Trump’s bold move to…

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

And it’s absolutely free.

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