Just a few short weeks ago, investors couldn’t dump iron ore fast enough. The raw material, used to make steel, plunged in price, sinking below $40 per dry metric ton earlier this year.
Market Roundup
But something extraordinary happened overnight. Iron ore futures prices exploded 21% on the Singapore Exchange, the biggest one-day rise in history. Similar explosions took place in Chinese metals markets, with one analyst in Shenzhen telling Bloomberg the “iron ore and steel markets have gone berserk.”
But even that crazy move pales into comparison to some of the moves I’m seeing in some of the lousiest, riskiest publicly traded companies in the entire market. Take SeaDrill Ltd (SDRL), a Norwegian offshore drilling firm that also trades on U.S. markets.
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| Panic buying: A bad sign for the markets? |
The collapse in offshore drilling activity and pricing has absolutely crushed the stock in the last few years, as have concerns about the threat of bankruptcy given its high debt load. In the two years through early last week, SDRL plunged to less than $2 from the mid-$30s.
But on Friday, the stock went ballistic. Its U.S. shares soared by almost 200% at one point on volume of around 148 million. That’s more than 13 times the stock’s average turnover, and by far the biggest rally in the company’s almost-11-year history of trading in the States. Several other two-bit, nearly bankrupt energy and commodity firms that I track doubled or tripled in a matter of a couple days, or even hours, late last week.
Take Linn Energy LLC (LINE). Citi Research just cut its rating to “sell” on the stock, and lowered its price target to … believe it or not … ZERO dollars. Â The firm also just said it’s exploring “strategic alternatives related to its capital structure,” which is often corporate speak for “We may need to file for bankruptcy.” And to top it all off, Linn just said it couldn’t file its 10-K annual report because it needed extra time to prepare its statements and disclosures.
But, lo and behold, its shares are en fuego — almost doubling in price today alone! You could’ve bought this nearly broke turkey for 40 cents last Wednesday … then sold it for just over $2 this morning. That’s a five-bagger … more than you can get on a lot of bets in Vegas.”
Heck, the InterContinental Exchange just reported that long positions in the Brent crude oil market hit an all-time record last week. This is literally only a few weeks from when oil was trading in the mid-$20s, and investors and analysts were falling all over themselves to predict a drop into the teens.
Bottom line: From iron ore to oil to everything in between, we’ve gone from panic selling to panic buying. From desperation to euphoria. From madness to madness.
| “From desperation to euphoria. From madness to madness.” |
Some may call me old-fashioned. But I don’t find that kind of market action healthy at all. I think it just shows how sick this market has become. It speaks to an underlying level of volatility and risk that we didn’t face from 2009 through 2015 … but that I believe we’re going to be coping with throughout 2016 and 2017. So be sure you’re prepared for that.
Hold higher levels of cash. Stick with safer, higher-yielding, stable stocks in non-economically sensitive sectors. And consider trading more actively for a portion of your capital. Buy long positions on big selloffs and dump them on big rallies … or alternatively, get “short” on rallies and grab gains on those short positions when the inevitable selloffs follow. Doing so should help you stay one step ahead of the incredible volatility and manic-depressive behavior we’re seeing in markets.
That’s my take, at least. What’s yours? Why do you think markets are swinging so wildly from depression to euphoria, and what are you doing about it in your own portfolio? Are there sectors or stocks you’re turning to for safety and stability here? Hit up the comment section and let me know.
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Friday’s employment report offered something for everyone on Wall Street. But here on this website, several of you zeroed in on the problem of underemployment and lackluster wage growth.
Reader Joe said: “I’ve been out of steady, good-paying work for over one year. I’m presently underemployed and cannot get more than 32 hours per week. Some of these numbers support my situation. The overall picture seems to ignore the fact that nearly 40% of the total workforce is in my situation.”
Reader Ted F. also noted the fact many jobs today are at the lower end of the wage spectrum. His take: “There are lots of companies advertising jobs in all kind of places, like the supermarket at the bottom of my receipt, the home improvement store, etc. You’re looking at starting at 20 hours a week at, being generous, up to a dollar above minimum wage. The jobs report doesn’t tell us the type of wages and hours, just the job numbers.”
Reader Chuck B. also picked up on that theme, saying: “Something I notice about the employment figures: More layoffs in generally high-paying mining and manufacturing. Hiring in service fields, which often do not pay as well. Health care is an exception, of course. So are the skilled construction jobs. But they are playing catch-up, after some slow years. Laborers don’t get so much, nor do many retail people.”
Finally, Reader Dan said: “As a retiree, it makes my blood boil when I hear these administration mouthpieces wax rosy and optimistic about the current economy they are so proud of ruining. Very few young people will ever have the pay and benefits I had, much less the fixed-income pension we live on.
“It breaks my heart to see intelligent young people struggling to survive on low-wage, less-than-full-time hours, because current government policy is anti-productive, anti- business, anti-capital-accumulation, you name it.”
Thank you for weighing in. The job market is clearly on everyone’s mind, because acceleration or deceleration in job growth will impact so many different market sectors. I personally believe that with the credit and economic cycle turning, we’re likely to see more fraying around the edges in employment and wage trends. But only time will tell.
Didn’t get a chance to comment yet? Don’t worry – you still have time to let me know your thoughts here in the discussion section.
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In January and early February, money fled higher-risk bonds, initial public offerings, and other riskier investments. The bounce since mid-February has enticed some of those dollars back in. We’ve seen a few IPOs and bond sales in the past few days, while high-yield funds just attracted a record amount of money in inflows.
Is this just a flash in the pan, one likely to be followed by renewed selling in the weeks and months ahead? That’s what my work suggests, considering how credit-cycle turns historically play out over a longer period of time. Or in other words, I wouldn’t chase this move.
The Bank for International Settlements (BIS) is often called the “central bank to central banks,” and the Swiss organization just warned that negative interest rates are likely to backfire because they cause unintended consequences. The European Central Bank (ECB) is likely to respond this week … by cutting rates further into negative territory! You can’t make this stuff up folks.
Chinese foreign exchange reserves declined yet again in February, dropping $28.6 billion to $3.2 trillion. That left reserves at the lowest level since 2011, but the pace of deterioration slowed from the prior three months.
Former first lady Nancy Reagan passed away Sunday at the age of 94 of congestive heart failure. Her husband, the 40th president Ronald Reagan, died in 2007.
So what do you think about the fresh warning on negative interest rates? The deterioration in Chinese reserves? How about the wild swings in market sentiment, and the resulting action in IPOs, junk bonds, and the like? Let me hear your thoughts on these or other topics in the comment section below.
Until next time,
Mike Larson
P.S. It’s a great thing that Kathy Lien records her phone calls!
Click this link to listen in on the late night phone call Boris Schlossberg just made to Kathy.
This urgent call begins with Boris saying “I think we’ve been fooling ourselves about China and Europe …”
It’s a short, 11-minute conversation that could help you turn every $10,000 you invest into more than $100,000.
CLICK THIS LINK to listen in on this private — and quite revealing — conversation now!
Recommended Articles by Mike Larson:
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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Hi Mike
I know a little bit about the iron ore industry. For some time now China’s slowing needs have depressed the iron ore producers and for the obvious reasons many producers have over produced to keep profits alive. Many smaller miners blamed the big boys for this over production, however consider the lead times from discovery to production for any miner. What has changed is the Samarco dam disaster, jointly owned by Vale and BHP. They have just reached an expensive out of court, which compensates for damage. This has done two things. Firstly, it has taken this huge mine out of the supply side statistics and Secondly, All the big miners are reconsidering dam stress tests for tailings etc. Iron ore has gone from a boom through a near bust to a supply side change. What you are seeing are bets on where we go from here, however BHP and RIO have cut their returns to share holders and need to be played more carefully as yield stocks.
As with everything else at the moment, we are on a merry-go-round until the music stops. When will the band stop playing, not many seem to know but the future is less in cash and more in hard assets.
you mean hard assets like iron?
The best property you can afford. Movable precious metals. Widely recommended stocks with low debt for yield and tradeable items of value, maintaining enough cash as a means of exchange. Risk appetite is a personal choice.
i still like the s&p. i won’t like it if it breaks certain support levels, and if that happens i’ll consider metals.
We are the only country where we can still buy gold relatively cheaply. Our high dollar gives us this short window of opportunity either now or when and if there is a final downturn. In most other countries gold measured in $US is considerably more expensive.
agreed.
cap ex for oil p&e has shutdown completely across the globe. the depletion rate for small countries like venesualia, nigeria, libya, etc., means they’re one day closer to running out of oil every day. you can figure out the rest.
I don’t know if the bottom is in for oil yet, but when this much cap-ex is shelved and everybody is producing all out, depletion will indeed be a factor. The oil we will need in the future won’t be there. There probably isn’t any such thing as Peak Oil but there’s definitely a peak in cheap oil. There is a brick wall somewhere in our future. Jim
P.S. The current active U.S. Rig count is the lowest since 1948! Jim
p.s. but i imagine the productions rates are exponentially higher.
I wish the real $1000 Gold was back
there was enough cap ex on the table by big oil companies that projects will continue to bring new production online for the next few years.
capacity should remain stable. so should prices. expect $2/gallon at the pump for some time to come.
I expect nothing. The whole oil mess is contrived. Jim
There is extreme irrationality in this market. The central bankers have really created a mess. The bear attack is near.
just market volatility. probably end up being a missed buying op by us chickens.
So, WHO exactly is doing all this buying? Is it from retail buyers, institutional buyers, or someone else? The market just doesn’t turn around on a dime like this without some sort of rationale. Why would commodities of all sorts suddenly become the darlings after being stinkers for so long. Is this related to central bank talk about the possible need for OMT (Outright Monetary Transactions) to finally get cash out to Main Street pockets (with inflation trailing directly after)?
The best hedge funds are the ones that specialize in “distressed assets”. The average investor buys high and sells low. I think the buyers are probably seasoned investors with longer time horizons than most of us. Buffet and Icahn come to mind. Buying stocks like Linn Energy are kind of like buying a call option. You don’t lose a lot if they fail but the possible rewards are big. FCX has nearly tripled from its low. I have never heard of panic buying. Jim
Maybe those with money to invest are tired of the negative interest rates. They have decided to invest in tangible properties instead. The panic buying may be an indicator of the perceived need for prompt action on the part of the investor community. In light of that one can only wonder what is in the offing.
Listen up.. The Federal Reserve wants inflation to pick up.. Is everyone looking in the rear view mail what a con job this is on most Americans.. Inflation increases the price of goods and services … Which leads to minimal increases in wages.. But pushes you into a higher tax bracket so you pay more Federal and State income taxes..
The government is in your pocket again……
Excellent comment – and very true!
My understanding of capitalism is that it is based on people having discretionary income. They can spend immediately on consumption or invest it to make jobs. The higher the return (interest rate), the more incentive there is to invest (create jobs). It seems that low and negative interest rates would be counterproductive.
Panic buying? I have heard of selling, but buying. Are some investors afraid some prices are going to take off like a rocket to the moon. And iron ore? The Chinese have been dumping finished steel at below production costs and their steel industry is facing, according to some reports, a fifty per cent unemployment rate and bankrupt steel companies in the worker paradise. There have been reports of workers taking to the streets. Has somebody been adding crazy pills to the water sources worldwide? Diversion: Many years ago a couple of us lumber drivers out of Oregon took some mine supports to a coal mine in West Virginia up in the mountains. We were following a company coal end dump truck to the mine out in the middle of nowhere. This idiot with a sports car kept passing us on curves, then stopping and passing us again and again. Well eventually he got wedged between the trailer and a guardrail. It seems everybody was related to everybody in the area so Cousin Clem the Deputy and Uncle Donald the sheriff showed up. One asked the car driver he was naturally this stupid or if he was on Stupid Pills. The other after looking at his license asked how many boxes of Cracker Jack he had to eat to get the license. We were bringing back sacked coal which we could not tarp because it turns out coal dust can be kind of explosive if it builds up, so can grain flour which is why it is moved around in storage silos.
Why the long position change in Brent crude is so positive befuddles me. Unless the Saudis, Iranians, Russians et al influence the market price upward, Brent crude will not fly upwards. I assume the long positions may consider such a tactic by the above mentioned “manipulators”.
Somebody is manipulating this market. There is little storage left for the “black gold” and yet a barrel has increased by $10 over the last couple months. Somebody is not telling us something.
Humans aren’t suddenly going to stop driving, building things, eating, and such It is in the nature of us all, that some will take advantage of a shortage of something to build a business supplying that something. It is in our nature, that too many someones will answer a shortage and create a surplus, with consequent price and business failures. We will ALWAYS go from shortage to surplus to shortage, and a smart investor will learn to use those cycles to his/her own advantage.
Trying to take off profits on very short, sharp market moves, is DAY TRADING! You are encouraging day traders. I don’t think this is prudent at all!!!
Correct – it definitely “a fools game”.
OMG, the Global Centeral Banks (including our own FED) claim to be “stimulating the Global Economy†when, in fact what they are doing is exactly the opposite of that! I am not completely sure if this is being done deliberately, or if these people really done have a clue!!!
I agree with your latest advice and plan on buying deep dips and selling the big rips in the markets using ETF’s/reverse ETF’s. I have made some money recently with gold and silver and am out of that position now. My account is mostly in cash but am eyeing some future shorts and am just waiting to pull the trigger, just not yet. With this volatility it seems almost impossible to hold anything longer term with any sort of confidence or conviction. Basic supply and demand economics do not seem to be working right now.
The negative interest rate situation is only going to get worse. The Central Bankers in Europe WANT everyone involved in the massive, unsustainable debt game. If you are alive, they want you playing…..(until it collapses). As someone above said, it is like a game of musical chairs and there will be MANY losers.
I read an article recently that indicated that the Central Bankers will stop printing large notes (e.g., the 500 Euro)…..so that it will be more difficult for mattress stuffers….their goal is to make the negative interest rate providers one of the FEW games in town. Stopping the production of large notes is just ONE of their machinations.
Hi Mike,
These are volatile times to say the least; but you have to be both present day orientated and future orientated to take advantage of them.
As to the rise in the price of iron ore, this appears to be coming out of China. I see two possible explanations: For one, Tangshan, located in the main steel producing region, is scheduled to host the International Horticultural Exposition from 29 April to 16 October; so I should think that production in that region is being brought forward (doesn’t that sound familiar). Second, I expect a big devaluation of the Yuan soon; which will help unload the steel produced.
Volatility should be expected when desperation first sets in; and 2016 is looking more and more desperate all of the time.
Use the panic buying time to sell.
another way of saying – sell the rallies?
I read that Saudi Arabia was interested in building up armaments…and didn’t they recently have a visit from the Chinese? Also, could it be possible that China is interested in building up their own war machine? I would think that metals would be very valuable in building up weaponry of all sorts. Russia has certainly made it clear to the world how powerful they are with their aircraft over Syria. Self-protection can be a powerful motivator. When economies go to heck and ruin, it seems that war inevitably follows.
High continuing debt doesn’t give us sustained growth. Market rallied back hard to risistence levels of 17000 plus. Look out below.
The financial collapse has left us with a totally changed world.
Sounds something of a technical Fibonacci retracement, perhaps it is mans nature to act with and fulfill the Fibonacci sequence.
This is a Keynesian economy, the same as 1929-1940. The gov’t kept pumping up the economy periodically and thus and up and down economy. Until we get leadership in Washington, it’s not going to change. Back then it was just Treasury, now it’s Fed and Treasury. But even with a new President can that be enough or do we wait til Yellen’s term is up. Until then it’ll likely be more of the same. We need another Reagan/Volcker team. Bill
Wall street games, Mike. You nailed it! You better be on the inside in markets like this.
Not worth a true investor’s time.
For Larry: You keep saying Euro is going down, but it keeps going up. What gives? It is giving me pain
you’ve got the real one here now. i just like to mess with the trolls. it’s all in good fun.
i’m sure i’ll return, howard. –gold