In the end, it's oil. Right now, oil's driving this bus and as long as we stay north of $80, it's a sanguine road ahead.
There are so many inputs that are affecting the market, but they seem to affect it serially. If there is no news on Ebola, then we default to Russia. If there is no news on Russia, we default to Germany. If there is no news on Germany we default to endless Federal Reserve discussions or the dollar.
But if everything else has been silenced, then it is oil that roars through the vacuum with a vengeance.
Yesterday was all about oil. Go look at the price of the futures. Go look at the stocks. Everything was hammered in the first hour of trading. Oil was breaking hard; next stop $75 because a bunch of folks have been saying -- rightly or wrongly -- that oil trades in five-dollar increments. In a panic, anyone will say anything.
The majors were getting crushed, starting with the ones that trade in Europe, think the hobbled BP (BP) and the annihilated Royal Dutch (RDS.A). Baker Hughes (BHI) had reported a gigantic miss, hideous. The independents were swooning again and the chaos in the master limited partnerships was continuing.
And then, out of nowhere, everything reversed. Oil held and then ripped upwards. The independents flew and the MLPs took off all at once because they all trade in unison courtesy the dozen or so important ETFs that own them.
Everything, everyone, was a coiled spring.
Now, I know that there's a perception that if oil keeps falling it will be good for the U.S. economy. But I can tell you that if you go read the Baker Hughes conference call, you will come back believing that while there are many good U.S. oil companies that can make plenty of money at these levels, there are plenty of others that would seem to be candidates for bankruptcy at much lower prices. They have borrowed so much and have such huge drilling programs, that they wouldn't be able to cut them back.
In fact I think there have been gigantic bets being made against a lot of these companies and that the short bets, which had been home runs, got undone yesterday.
It felt like small unit action out there, with Baker Hughes bemoaning $75 oil as a place where trouble comes in while Chesapeake (CHK) sells $5.4 billion in shale plays that had once been touted as some of the finest fields in the land. I don't know, Chesapeake, the seller, gained about $2 billion in market cap on the trade, while the buyer, Southwestern (SWN), lost about $1.2 billion, although I think some of the decline in the latter came because SWN pretty much eliminated itself from the sell block that everyone seems to think it is on, when it made that buy.
Now, here's what I surmise to have happened. I think the longs capitulated Wednesday and yesterday morning, blowing out of the oils and gas plays and the futures. Just margined out. The shorts, who had pressed their bets, didn't realize that the most recent drop was forced selling and actually had convinced themselves that it was short-term supply and demand. They went to cover when the market started going against them and there was no supply!
Consequently, we got the big jump.
Now, if you step back from the battlefield, you have huge algorithms that trigger S&P buying if they see oil going up because, to the machines, that means the economies around the world are doing better. The machines don't understand short squeezes. But by taking oil up, you take away the short-term pressure against the more levered oil companies and projects don't get cancelled and covenants don't get broken. Perhaps they never should have been in jeopardy in the first place. Perhaps there's more demand or less supply in the real world.
Whatever. The squeeze stayed throughout the day, we didn't get near the $75 breaking point for the levered oil companies, and even Baker Hughes ended up rallying.
Who knows, with that fantastic Schlumberger (SLB) quarter announced last evening, it could be game on for today, too!