Stocks sink as volatile oil prices, Middle East conflict weigh on trading
Market Scorecard
Oh man, where is Santa? The first few days of December haven't been very festive for stock market bulls. After an impressive run since the middle of October, we've bumped into some trouble. US markets sold off again yesterday, the fourth day in a row of losses. Let's remain calm, and keep in mind that slowing inflation and good economic fundamentals will result in the "soft landing" that we desire. It's only a matter of time before this phase of equity market volatility ends.
In company news, NRG Energy (NYSE:NRG) tumbled by 15% after agreeing to buy Vivint Smart Home (NYSE:VVNT) for $2.8 billion in cash. Elsewhere, Textron (NYSE:TXT) was the best large-cap performer rising 5.3% because it won a juicy contract to make helicopters for the US Army, that will replace the current fleet of Black Hawks.
In short, the JSE All-share closed down 0.18%, the S&P 500 was 1.44% lower, and the Nasdaq slipped 2.00%.
One Thing, From Paul
You may have noticed that we stopped reporting the daily moves of the Dow Jones Industrial Average. The Dow used to be the default US market index, but it's been supplanted by the S&P 500. We also track the Nasdaq, since it's got more tech stocks in it, and is a closer match to our model portfolio.
As Axios' Felix Salmon notes, "the Dow has a certain atavistic appeal, dating back to the days when computers didn't exist and trying to get a feel for the fortunes of the overall stock market was labour-intensive and nontrivial. Today, however, it's a solution in search of a problem".
According to Felix, the "DJIA is a pretty terrible market bellwether. Many years it veers away from the S&P 500 by about 5 percentage points; this year, it's even less accurate, outperforming the market by a whopping 9.5 percentage points year-to-date".
That's because the Dow is an average, not an index, it just averages the nominal share prices of 30 stocks. At current weightings, UnitedHealth (NYSE:UNH) has 3.5 times the weighting of Apple (NASDAQ:AAPL), and 18 times the weighting of Intel (NASDAQ:INTC). Major companies like Google (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Berkshire Hathaway (NYSE:BRKa) aren't even included.
Things change, we've moved on.
Byron's Beats
If you've been reading my opinions over the last few years you will know I am not a fan of OPEC. An organised cartel that colludes to set prices and production levels and rips off the entire planet should not be allowed.
Ironically, Russia's misbehaviour has given oil buying nations an excuse to come up with a potential solution. On Monday, a punitive price cap on Russian oil came into effect. The European Union, G7 and Australia have all agreed that the highest price they will pay for Russian oil is $60 a barrel. Putin is livid.
The price cap is designed to limit profits for Russia to fund its illegal war in Ukraine but it could be a pretty effective way to counter OPEC in the future. The opposite of a producer cartel is a buyers club. Let's see how this initial plan works. Like all agreements of this nature, everyone has to stick to the plan.
Michael's Musings
Sometimes it may seem like we coordinate our individual pieces in this newsletter, but that isn't the case. For example, today I had started writing about the irrelevance of the Dow when Paul's contribution landed in my inbox. So, I pivoted to writing about OPEC and then Byron's piece arrived. Thankfully mine ties in well with Beats, after a bit of extra work.
OPEC's high oil prices and the collapse of Eskom's coal fired power stations has resulted in a transfer of South African wealth to oil-producing nations. Our beleaguered national utility has already spent over R12 billion on diesel this year. You can add to that all the extra money spent by private generators. For example Shoprite has been forking out around R100 million on diesel a month. That's a lot of wasted money flowing out of the country that could have been used to build local infrastructure.
As Byron points out, the pushback by the major oil-buying nations will only work if their discipline holds. It is noteworthy that China and India, two major oil consumers, are not on board. Russia exports about 10 million barrels of oil a day. China imports about 8 million barrels and India imports about 4 million a day. All Russian oil could go to those two countries in time.
Some US lawmakers have floated the idea of suing OPEC for price fixing. It would involve the US Congress passing new laws and then proving in court that price fixing took place. Sounds like a long shot to me. The best way to beat OPEC is to find alternative, non-fossil fuel sources and make the cartel irrelevant.
Bright's Banter
Saudi Aramco's (TADAWUL:2222) Luberef refineries is planning an IPO in Riyadh. Luberef filed to list last Sunday, and said it wanted to raise as much as $1.32 billion as private equity firm Jadwa sells down its 30% stake in the business. The roadshow will last up until December 18 which is when we will know the outcome of the placement process.
Luberef has operations in the industrial cities of Jeddah and Yanbu, producing various base oils and byproducts and is still 70% owned by Saudi Aramco. The rest is held by Jadwa, which is selling the entire stake it bought in 2007 from Exxon Mobil (NYSE:XOM). This seems like a decent exit by the private equity firm as oil prices have remained relatively high in recent months.
Gulf IPOs have raised $19.2 billion in 2022 so far, as high oil prices benefit the Middle Eastern economies, markets and companies' balance sheets. This would be a record year if it weren't for the massive $29.4 billion Saudi Aramco listing in 2019. The only issue is that none of these 2022 listings have made cash for new investors.
Signing Off
Asian markets are down this morning, following weaker than expected trade data from China, with both imports and exports falling. Equity benchmarks in Hong Kong, mainland China, South Korea and Japan all declined.
NY Mercantile oil is trading at just $74.35 a barrel, the lowest level since last December. US equity futures are flat in early trade. The Rand is trading around R17.36 to the US Dollar.
Have a top day, the sun is shining on the Highveld.