All's forgiven? Stocks are now too cheap and ready to roar?
I think it is a little more complicated than that. I've spend a lot of time analyzing the Master Limited Partnership space and I think that what happened there in the last few days is most instructive for the rest of the market.
First, you have this group of down stocks, down because despite many being "toll roads" others have aspects of commodity exposure and still others have aspects of hidden commodity exposure that you don't find out about until oil and natural gas have been crushed.
Second, you have a consensus that rate hikes are coming, multiple rate hikes, because no one believes the one and done crowd. So yield isn't worth as much as we thought as protection.
Third, as drilling projects get canceled and barrels per day drop, you have to reach the conclusion that we won't be needing all the pipe we thought we did when we envisioned us passing the Saudis, or whatever golden opportunity we thought was ahead of us.
Fourth, oil fell the most of all commodities, 25% this past quarter, which meant that not only did you have hidden commodity exposure but you had a recognition that the run up to $60 last spring was phony and we are now in a world of "lower, longer" oil prices, perhaps the $30s, which seems, again, to be consensus EVEN as we seem to have a hard time going through $45.
Fifth, the group has horrendously concentrated and weak owners -- always does. Often the same owners own different pipelines. When Williams Partners (WPZ) and Energy Transfer Equity (ETE) agreed to merge, some of these owners had ridiculously high concentrations in the combination and had to blow them out right at the end of the quarter.
Sixth, these companies are serial equity issuers, with a tremendous thirst for debt to build more pipelines. Their distributions can't grow unless they can endlessly build and take in more fees. You crush the stocks, you can't issue equity cheaply. You crush the high-yield bond market, you crush the easy source of financing. They don't have spare cash to buy back stock because that's not what they do.
Seventh, beside the concentration of owners, these companies are perceived as cash cows -- or at least were perceived as cash cows -- where you could get a 6%-7% steady yield without much risk to principal and could therefore borrow at 1% to pick up, say, 5% "risk free."
So, you have a worst-of-all-worlds situation, and when I say worst of all worlds I am talking about a nightmare of combinations that took a group from being consistent with a nice return to being the worst group in the market.
It then becomes very self-fulfilling. If a 6% yield doesn't stop a decline, how will a seven? If a seventh doesn't, how will an 8%? And in the case of a lot of these in the last week, if a 10% yield doesn't stop it, nothing can.
At the same time, the investors with funds that have a high concentration either seek redemptions or sell their ETFs and funds that contain these to end the gut-wrenching pain.
But then because the selling in many cases is quarterly driven, the sellers finish. They dry up. All of a sudden, opportunistic people not in the moment, not caught up in this disastrous situation, say "hey, I can buy Energy Transfer Partners yielding 10% and it has to go down huge before I don't net out positive." Then that person actually does work and recognizes that ETP does well with low natural gas prices, because more will be used and the company has a hammerlock on some of the best markets.
And the psychology overnight changes.
Just like that.
Now you have a stock like ETP that is a coiled spring where it goes IN ONE DAY from being a terrible chart to being a terrific one with a real snap back. You have a group that seems to be attractive given there's an oil rally.
So, the first day run brings out buyers from the sidelines, not sellers, as buyers just don't like freefalling stocks or groups.
I call it the "emboldened" factor. People are emboldened. So for the moment -- because there are still too many things wrong with the group to sound an all clear -- the buyers come in and are opportunistic at, say in the case of ETP, the 10% level. Who knows if that case will still be made at the 9% level, but the reverse psychology will certainly play out if oil stabilizes or goes higher.
And that's how you get a turn. That's how you get a better opening.
Now, this group is extreme. But all over the stock market you have others surveying the situation and saying "worst is over."
All I can say is that the worst of the end of the quarter selling is over because, alas, it is the end of the quarter.
Will fresh money really be enticed to come in?
We won't have long to wait to find out.
Correction: A previous version of this story mistakenly identified the merger partners as Williams Partners and Energy Transfer Partners. The second party is Energy Transfer Equity.