They're back! The inputs that made us sell before are now upon us. The super-freaking strong dollar and lower oil are creating the havoc that they had wrought ever since the year began with a respite taken during the month of July.
What's to be done? How did this befall us again?
Let's start with oil. We know that oil's declined more than 20% from its high, which qualifies as a bear market for whatever that characterization is worth.
It's remarkable how little it seemed to matter that oil had gone from $50 to $40. The whole market moved higher and it was often led by none other than the oils themselves.
It all culminated with a crash of oil down to $40 last Friday at the same time that Chevron CVX actually finished higher after a very weak quarter where pretty much everything went wrong.
That was just plain preposterous to me. How could Chevron not get crushed with crude? Turns out we got a delayed reaction and now it looks like the stock is rolling over. Didn't matter at first, now it matters a lot.
For a while we figured that oil had simply decoupled from the broader averages, too. But as of this week that's no longer the case. That's because of a growing belief that I talked about yesterday that the autos, which had very weak sales numbers today, are signaling a slowdown and the oil market agrees with it.
This is that demand story I keep talking about, that there's not enough demand out there or oil would be going up, not down.
Today the weakness theory is buttressed by the action, not just in the autos, where the stocks are being crushed on account of weak July sales, but also in the obliteration of the airline and cruise ship stocks.
Now we have to dive deeper into this situation to understand exactly what's going on because we are getting some very strange cross currents here.
Let's start with the bear case. Oil's going down because not enough is being used, which is theoretically what happens in a slowdown. The cruise ships are down because there isn't enough demand for tickets -- witness the stunning decline in the stock of Royal Caribbean (RCL) , which reported today. Obviously this stock wouldn't have fallen $4, or more than 6%, if it weren't for consumer-led weakness.
Same goes for the airlines. They are all being clubbed and, again, if you are a skeptic, you have to say that's got to be the demand side. American (AAL) , Delta (DAL) , JetBlue (JBLU) , Southwest (LUV) and United (UAL) don't fall this hard if there's steady demand for seats.
So can we can conclude that the economy is weakening and it's time to sell? Unclear. Let's be a little less skeptical for a moment, can we?.
First, oil. We learned from RBN, the newsletter I go to get the oil skinny, that in the last month, that in the last few weeks the oil flow from the Canadian oil sands, which was staunched by the wildfires, has now returned with a vengeance. One million barrels had been taken off line. As of this month they have all returned to service. So oil had been artificially kept higher, not by additional demand but by a lack of supply. The addition of that million barrels a day is what has overwhelmed the market, not the lack of demand. In fact, all studies of driving this summer show a pick-up in gasoline use. I know that gets in the way of the story but it's just the facts and we are stuck with them.
Let's go a step further. Consider the curious case of Royal Caribbean. The stock is being hammered now after it reported a very good quarter. Why? Not anything the company said other than currency and a slower Chinese market and some higher fuel costs.
Now, of course with oil well below where it was when the quarter closed, the negative fuel case has diminished. The dollar? It's a problem. Ever since Brexit the dollar's been getting stronger and I have not liked that the market has ignored it. I don't like what's happened to the dollar and it is a real negative for certain. In fact, I totally get why people can be concerned if the pace of the dollar rally continues.
But let's be candid. When Richard Fain, the CEO of Royal Caribbean came on CNBC this afternoon to talk about his company, what was he asked about, multiple times? The Zika virus. With the Zika cases in Miami being headline news and 20% of his cruises emanating from Miami, that's the journalistic focal point. I say journalistic because the company says there have been no cancellations from it and no real impact at all from it. Indeed, the CFO described the North American demand as "unwavering" and that there are "solid trends in our Caribbean portfolio" and that winter bookings are in a "very strong position."
Now, the analysts on the call took this as gospel. There were no questions about Zika at all.
But the zeitgeist around the stock is definitively Zika. In fact, I would add that the entire decline in the airlines is related to a belief that because of the prevalence of Zika and the apparent inability to control it, bookings will be cancelled.
And you can't deny the whole concept. During the Ebola scare two years ago we saw a huge decline in the airline stocks without anything ever happening to their actual fundamentals. I don't care if the Royal Caribbean analysts aren't interested in it, the journalists are dead right to ask. How can you not considering how top of mind it is?
So, now we could argue that it's not the demand side of oil drying up, it's the supply side expanding because of Canadian tar sands. We could argue it's not the demand side of the airlines or the cruise ships, per se, it's Zika. So to take our consumer cue from either would be wrong.
Where does this all leave us? Once again, in a rational world we should think that oil going down is helpful as long as it is from the supply side not from the demand side. We should feel better about the state of the economy if these transports are going down because of Zika and not because of a lack of consumer buying power.
At the same time, though, if we are re-coupled, then we have to accept it and recognize that once again we are going to have to accept a judgment that isn't necessarily based in fact and live with it.
So what plays out next if oil keeps going down? What's the next domino? The banks. When the banks reported a month ago oil was at $50 and looked like it was going to $60.
Now that it is at $40 and looking like it is going to $30 we have to worry that people re-open the story about how the banks are on the hook to the oil companies.
Again, given how I am not as bearish as most on oil, I think that this is not a concern that deserves to come into play. But like in Unforgiven, deserves got nothing to do with it. So it will. You need to be ready to see all the major banks come down off this oil story.
It happened before, it could happen again even as many of the oil companies have refinanced by issuing equity and many of the banks have been able to sell bad loans or have already taken charges and reserves for them.
But perception always trumps reality, at least initially and then we settle into a fact-based situation and we can make money on what's actually happening other than the nightmare scenarios that are so easily traced out.
So, brace yourself for the continued concerns about declining demand, which would be bad for earnings even as we suspect, correctly, I believe, that it's the supply side and Zika fears that are driving things.