Thursday, January 21, 2016

Fundamentals Don't Matter Right Now, It's Panic On The Way Down.....

Fundamentals Don't Matter Right Now, It's Panic On The Way Down

A confluence of factors including the continued devaluation of the yuan, plunging oil, and soaring HY risk have brought markets to the precipice and the bears are out in force, with the likes of Albert Edwards calling for a horrific 75% plunge in the S&P.

In short: the writing is on the wall and you should probably read it.

It's time for capital preservation.

Even if an oversupply of oil provided the trigger for yesterday's capitulation, in a broader sense fundamentals don't matter right now. That's frequently the case in the short term (bubbles on the way up; panic on the way down), even if they always matter in the long-term.

Equities in most major markets have broken multi-year uptrends; North American credit-default swaps are the priciest in three years; investors are dumping emerging- market assets at the fastest pace ever; the commodities fall remains unchecked.

Brent is heading for its longest losing streak since May 2010, and is the cheapest in almost 12 years. Cheaper energy is a net boon for the global economy, even if not for financial assets.

Global economic data hasn't been bad in the first two weeks of the year. There have been some surprises, but nothing shocking.

We're experiencing wealth-destruction due to asset-price dynamics alone. The negative moves will stop only when excess leverage is trimmed and not just when prices return to "fair value."

Equities may experience the most pain in coming weeks because they've had the least severe corrections in the past few years. Commodities, emerging markets and high- yield credit are still vulnerable, but they're already on their knees so don't have as far to fall.


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