Matein Khalid
In a financial panic, investors sell what they can and not what they must. So the most ominous data points for me is the dramatic widening in US corporate credit/high yield spreads, which means Mr. Market is now certain that default risk will strangle capital markets as varied as auto finance, subprime mortgages, student loan and credit card receivables. The widening of Asian sovereign credit default swaps also attests that the business model of export driven emerging markets is kaput. A conclusion reinforced by the 18% plunge in the shares of Standard Chartered Bank PLC in Hong Kong.
In Europe, Rheinmetall was down 27% at the Frankfurt open and Leonardo was down 16% at the Milano aprire, proving that desperate investors are selling the winners from Europe’s rockstar defense sector to meet margin calls. In France, LVMH is now below €500 and the shares of BNP/SocGen have been gutted even as Macron wants the EU to ban investments in America and the jail sentence for Le Pen could well plunge the Fifth Republic into a constitutional limbo.
I was watching Switzerland’s Nestle for signs of potential safe haven status this morning in Zurich but the colossus of Vevey is down 5.5%, which only means that a lot of Kirschwasser will be drunk in the bistros off the Bahnhofstrasse as the private bank grandees of Helvetica realize that they are short a trillion dollars in structured products to their clients at a time when the VIX is 60. The bloodbath in client portfolios will be felt all over the Gulf with its epicenter in Dubai’s DIFC with the obvious fallout in bank payrolls and obscene rents.
Brent is now down 18% from its $74 levels last week and Saudi Aramco has lost $200 billion in market cap even as the Tadawul index falls to 12,000 and Emaar now trades at 10.70 AED, down from 13.3 in this cycle. Is the bloodbath in the oil market over? No. It has barely begun since a global recession, a collapse in Asian consumption growth and a US/EU slump eviscerate demand. Saudi Aramco slashed prices to Asian refiners and proved that the OPEC+ output hike last Thursday was no fluke. The kingdom has now begun a price war for downstream market share to punish quota cheaters from Astana to Baghdad and braces for a showdown with post sanction Russia.
We are on the eve of another 2014/15 oil price crash when Brent plunged from 115 to 28, Emaar fell from 6.82 to 2.95 AED (split adjusted) and the property market began a 6-year bear market that witnessed a 60% drop in prices. Will this cycle be any different now that we have an OPEC+ price war coupled with a global recession? You tell me?
The S&P 500 has stabilized in past cycles at 13-14X and only after credit spreads peak not when earnings bottom. We are now at 20X forward earnings even if you believe that Santa Claus will prevent an earnings hit. Sadly, I do not believe in Santa Claus, whether DonnyT or JayPo.
Also published on Medium.
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