Entries by Bob Loukas

Keep It Simple

December 23, 2014 in /by

What a crazy equity market this has become. The swings are just insane. I know in this business what’s “normal” is often tough to define, with the markets fully capable of a variety of wild but still-acceptable swings. Still, I have no qualms in calling the current market “irrational”. It’s a condition often found near major market lows and highs.

It was just two weeks ago that we witnessed the largest weekly selloff in over two years. That 5% decline occurred in a single week and sent the S&P tumbling below 2,000. What followed was a pair of 2% daily gains, packaged in a 3 day rally that added an amazing 100 points. This level of volatility and price fluctuation is indicative of a market controlled by speculative forces. Equities have been divorced from fundamentals for at least 3 years, leaving the market at the mercy of speculative actors: under-performing funds, speculative traders, hedge funds, and programmed bots designed to perpetuate the trend for as long as possible.

An Epic Blowout

December 15, 2014 in /by

Through easy money policies and backstopping the market, the FED encouraged an energy resource boom that became speculative and unsustainable. And so long as Crude prices stayed comfortably above $90, investments made money and everyone was happy. But the debts behind the investments were structured based upon a certain level of Crude prices. The six-month, 47% decline in Crude has pushed price well below the level needed.

It’s not exactly a Black Swan event, since Crude and other assets occasionally move with incredible ferocity. But to a highly levered and speculative population who chose to ignore the risks as being far too improbable to worry about, it’s a situation where debt cannot be offloaded at any reasonable price. At $55 bbl Crude prices, much of the new debt simply does not work, meaning that significant energy company junk bond defaults will occur. Although this is obviously bad for the energy complex, it also has very real implications for broader systemic risk.

Bonds Still Have Legs

December 8, 2014 in /by

A solid U.S. employment report on Friday sparked a sell-off in the U.S. government bond market. And with the positive report, the FED is now under pressure to raise rates sooner than the market had been expecting. Considering that the bond market is already deep enough in the current Daily Cycle, it was surprising to […]