Stocks Plunge Amid Oil Shock

at Bloomberg dot com. Oil prices in a free fall today after over the weekend, negotiations between Russia and Saudi Arabia as well as the rest of the OPEC allies broke down completely, and to quote Julian Lee, who is a Bloomberg opinion columnist and Bloomberg oil strategist, in a column over the weekend, he wrote, this is developing into a game wool blink first between two contestants who have

cut off their eyelids. The key question what can make them come together and actually end this price war that is ravaging oil prices. Ellen Wald is deeply familiar with Mohammed bin Selman of Saudi Arabia as well as entire oil complex, and she joins us Now ellen Wald, president of Transversal Consulting, a Bloomberg Opinion contributor and friend of

the show, Ellen, so glad to have you here. Can you give us a sense of what it will take to bring Saudi Arabia and Russia back to the table to come to some kind of agreement and stave off some of these declines. I'm not sure that there is a real possibility at this point to bring them back to the table, because what you're looking at our two powers to oil powers that have fundamentally different strategies and different goals. Here, Russia's goal is Russia. Frankly, Russia is

looking out for number one. It's looking out for Russia. And then you have Saudi Arabia, which, in addition to having its own interests at heart, also cares about OPEQ and it cares about its political power within OPEC. That's not something that Russia really cares for. And so Saudi Arabia is saying, look, we said basically at this OPEC meeting, we see a crisis in demand, we need to cut oil production. We're going to do our part, but we need you to also do your part. We're not going

it alone anymore. Because back in December, we essentially saw Saudi Arabia saying, let's all cut, but we're going to cut so much more as an incentive. And Russia is looking at this saying, why should we cut when we can get the saudiast to do it, And the Saudias said, no, we're not going to do that this time. And now you've got a price war and a production war with a variance or now come for Saudi Arabia said, Abybia can win the production war, they've got more spare capacity.

But is there really a winner in a production war where you can't find buyers for that oil? And that's really the question. Yeah, And that's kind of where I wanted to go. I mean, I get Russia may have different agenda, may have a different agenda than Opeque in Saudi Arabia, but they don't benefit from this plunging oil price. So what's kind of there? How much pain can they

really take? Do you think? Well? Right now they've said that they can take Hayne for six to ten years, that they're willing to accept prices between you and thirty dollars a barrel, which, by the way, they're not really making money at that price point, whereas Saudi Arabia can make money, But they're saying, look, we've got a hundred and fifty billion dollar UH Sovereign Wealth Fund, and we're willing to sell those assets to fund our budget for

six to ten years. So whereas on Saudi Arabia side, they can pump oil for two dollars and eighty cents, so if they're selling it at twenty five dollars a barrel, they're still making a profit, whereas Russian companies might not necessarily be making a profit. But is Saudi Arabia really willing to deploy other funds to stave off budgetary issues?

And that's a totally different question, and it's not clear that Saudi Arabia is prepared with its sovereign Wealth fund to do the same kind of thing that Russia is. Ellen it doesn't sound like there's an easy resolution to this, then yeah, I don't. I don't see an easy resolution. I think that that if they got to other and they started talking, that tensions would definitely calm down. And I do think that there is um continued communication between

the two. You've got a Russian oil ministry, Russian energy ministry that wants to still sell Saudi Arabia nuclear technology and liquefied natural gas. So it's not like all communication is suddenly cut. This isn't, you know, the Cold War between Saudi Arabia and Russia. But um, it's not going

to be resolved tomorrow, well but for sure. But so let's let's just sort of extrapolate out if this is a prolonged issue tension locking of heads here over what production ought to be, what is going to be the consequence for the entire oil complex, in particular the shale patch which we're seeing right now getting crushed in the high old bond market. To also the oil majors, which shares have actually been just absolutely devastated today. Yeah, they're

they're going to have a tough time. I don't think that it's a death knell for the shale oil patch because the assets are still there and they're still going to be valuable, and so you are, you're going to have people getting crushed. But you will see war consolidation, You'll see you know, the players that can the oil majors taking on, you know, buying up well producing good producing assets. Um, it won't be fun there and the area is definitely going to experience an economic contraction. But

you can't kill the assets. They're still there. However, places like Venezuela and Iran that are really on the brink are going to have a very hard time of it, particularly because Russia has played such a big role in kind of keeping Venezuela limping along. Ellen, Well, thank you so much for joining us. Ellen wall is a president of Transversal Consulting. She's also Bloomberg Opinion contributor, and we always appreciate her commentary and thoughts on the global energy

markets with her great experience. Well, with markets in free fall this morning, some might be tempted in the equity markets maybe dip their toe, try to find some value. Some are going to say, I'm not getting anywhere near this freight train right here. Let's get an informed opinion from Gina Martin Adam. She's a senior equity strategist for Bloomberg Intelligence. She joins us here on our Bloomberg Interactive

Broker Studio. So, Gina, what do you make of not just today, but maybe the last ten or you know, days or two weeks? Uh, this market activity we've seen in equities? Yeah, you know, I think the market started off at an overbought condition. You have to consider that as the starting point, we were overbought, we were likely overconfident. Valuations were well above our modeled estimates for where fair

value was then. So we started to see that deflation with the coronavirus concerns and as those spread around the world. Obviously that created a tremendous amount of technical weakness in the markets, but did start to create some fundamental value at the very least. Now you've got the destabilizing effect to oil prices adding onto the pressure, so it's almost like this pile on effect that the equity market is experiencing.

You know, My sense is you don't normally get a five to seven percent decline in a single day on stocks, and usually those are representative of pretty significant panic lows. But you can't eliminate the possibility that there's further downside from here, because you're trying to predict human behavior and risk tolerance, and that's just impossible to do. I think a lot of this for investors is going to depend

upon your time horizon. If you're thinking, you know, I gotta be up, and I've got to be up in the next two weeks, your time horizon is probably too short. To have a whole lot of confidence. If your time horizon is the next fifteen years, I want to look for some value for a fifteen year time horizon. Then you've got to start thinking about sharpening your pencils and finding some ideas in the equity market because true value

has been unlocked here. Um when we look at things like the oil price impact, for instance, on fundamentals, the energy sector is three percent of the market cap of the SMP five hundred. Now, so a falling oil price is not particularly detrimental detrimental to the earnings outlook, unless it's accompanied by, you know, a snowball effect of serious economic recession emerging, big declines in new orders, growth, employment conditions deteriorating significantly. Those are the things that you want

to look at. And if that's the case, then you want to start to price recession. I do say, to price recession, We've probably got quite a bit of downside risk still to come, you know, will we have recession or not? As still a toss up? Well, that's that's exactly where I wanted to go. What would it look like for us to price in recession? How much worse would it get? Yeah, So our view is to price recession,

we probably have to go to around sixty five. That's taking an assumption of where the fair value multiple is considering where interest rates are, and we all know that interest rates are extremely accommodative for equity and valuations right now, but also your average recessionary decline in EPs, which is about on earnings. To get to combine those two models, and you get a downside risk for the s P five all the way down to which is a bit

more than your average recessionary decline. It's a more than decline in stocks from peach trough. We're tritting with Gina Martin Adams and Bloomberg Intelligence. We have the SMP down one seventy, that's five point seven percent, the Dow off about fifteen hundred points here. So Gina, let's talk technical levels. As I know you like to look at charts as well as the fundamentals here. Where are we kind of broad market in terms of support levels and that that

kind of thing. Well, we busted through the retracement level, which you know we had been watching that pretty carefully. That's right around sixty on the SMP five hundred. That's where we found stabilization to Fridays ago on that major capitulation low. Um. We certainly didn't even test it last Friday, even though our closing low on Friday was pretty weak. So at this point, I think hundred is serving as

some sort of round number resistance. It happens to mark a low from several low points over the course of the last year as well. Then you've got to get all the way back into the correction, and which really is dicey technicals, right, I mean, there's just very few consistent levels to lean on back in that correction I'm looking at right now as the level to watch on

the index. How concerned are you about a panic among retail investors as they start to see some of the headlines and here some of the rhetoric out of Wall Street today. Yeah, you know, it's really interesting. Our et F team has actually done a lot of analysis on this, and the retail investor is the sort of one solid leg that's been in the equity market even in August. Remember all the panic activity in the equity market that

we experienced in August. We had a couple of three percent down days in the midst of only a five percent correction. It was very odd very similarly this time around. The retail investor does not appear to be managed manipulating their portfolio. They're not really giving up the ghost on equity, so they are inherently a source of support, while the institutional investor has been significantly more volatile and more weak

over the last couple of corrections. So I am somewhat concerned if we do get that kind of last bastition of stability capitulating on the on the equity rally, it could create a pretty big down draft. But so far that investor seems to be sticking it out. Gina Martin Adams, thank you so much for being with us, always illuminating.

Gina Martin Adams, chief equity strategist for us here at Bloomberg Intelligence, insightful to hear about the fact that we're not even pricing in recession yet we have another five percent more to go lower in the S and P before we get to the levels that would price that in. According to Gina Martin Adams, who has been absolutely stending on this consistently throughout Boy On days like today, when you've got risk assets across the board trading off substantially,

some say in a panic mode. It is always good to have our good friend Christina Hooper join us give us some perspective here. Christina Hooper's investcos chief Global Market Strategists. She joins us here in our Bloomberg Interactive Broker studio. So Christina, thanks so much for joining. I know it's a busy day for you and dealing with clients. Just help us put into perspective what we've seen, not just in the last week or so, but particularly this morning,

with the news over the weekend about oil and the coronavirus. Well, I think of it as a one to punch. UM markets had come under significant pressure as a result of the Corona virus outbreak that spread the concerns about the impact on the economy. And then of course we had events evolved in oil markets such that we now have a supply shock, uh, that disagreement between Russia and the rest of OPEC plus which then led to the Saudias

deciding to add to supply. And so this is a scenario where now we're going to see HILD come under We're already seeing high you'ld come under very significant pressure. Um, the energy sector is coming under very significant pressure. And so that is UM really impacting the environment. And I think what in general we're seeing is a lack of confidence in markets because UM, there is UH, there's not a lot of certainty about whether or not we're going

to get an appropriate response from governments. To me, this is what is at the heart of this issue, is that what we've seen really since the global financial crisis is strong monetary response and a lackluster fiscal response. And now it's clear that we need a fiscal response. But I think in the memory of the memories of many investors is the fact that TARP narrowly passed UM that UM, we didn't get much in the way a fiscal stimulus, even though that's what we really need to help companies

get through UM the next few months. If we don't get to use your words, an appropriate fiscal response within the next few weeks, say even two months, what will the fallout be like, Well, it will elongate UH, an

economic downturn. I mean really, at this we're at essentially and decision point where we could go in a variety of different directions, depending upon certainly the lifespan of the outbreak UM, but more importantly the response to it, the health care response, to it um, the fiscal response to it,

and the monetary policy response to it. And so my expectation, my hope is that we get enough of a fiscal response, But if we don't, it elongates the downturn um and it in many ways it could worsen that downturn over time. We can look to China as a model of how to do it right. Um. China actually provided significant stimulus,

not just monetary but fiscal. We were hearing from US companies that were saying they were getting subsidized loans from China to continue to pay employees even though they weren't coming to work. That's the kind of thing we need in this environment to really get through because we know that there are a lot of Americans that are very vulnerable,

that don't have any significant level of emergency savings. That's not really a concern when things are going well, but it is a concern when things are starting to go poorly and they might actually see hourly wages cut because of all the cancelations that we're seeing, all the change

in plans, all the disruption being caused by the outbreak. Essentially, there's a story on the Bloomberg right now that President Trump's aids are actually drafting economic steps to fight the virus fall out, So maybe we'll even get some news on that potentially uh today, So we'll have to see how that plays in. So Christine, as you think about this,

what's the correct analysis to do? Is it to kind of look at valuation, try to find names that you know, the business models that you feel are strong, and if you find that you know good valuation points, to maybe

put some money to work. Absolutely, I think this is time to be really writing a list and referring to that list as you watch the carnage in markets, because there are a lot of great names that get beaten down in the short run because, as we know, UM, when there's blood in the water, UM, there's just insanity in the minds of investors. And UM stocks might be a voting machine in the short run, but over the

longer run they are a weighing machine. And so they're definitely opportunities out there that are being created by a miss pricing of asset classes. I think of this as the real march madness, all right. One question that I have is how easy is it to execute at those prices? In other words, how fluid is a financial system. Right now, we're hearing anecdotally of some difficulties with respect to executing trades. Well, I think that for the most part, what I've heard

is that trades have gone through smoothly. I think it depends on the volume, UM. But investors don't need to pile on in all at once. UM. Have a clear head about buying as well as selling. But have that list UM, refer to it and and see the opportunities created by carnage. It's very hard to call a bottom. I know Mark Haines UH famously did that a while back on on this advanced anniversary twelve years ago. UM,

but it's very hard to do that. UM. But you know when things are getting oversold, and so you can speak in UH to create entry points. Right now, a lot of the selling action really has stemmed from institutional investors. We haven't seen the mass flight when it comes to retailers. Just real quickly, How concerned are you about that? I'm not too concerned at this point because certainly for those investors that do have that are advised UM, they're likely

to maintain exposure. I think that our industry has done a better and better job of really stressing the importance of taking a long term view that for so many, for example, the fourth quarter of two thousand and eighteen was a blip. Now was very disappointed to get those statements, but at the end of the day it was quickly erased.

Christina Hooper, wonderful having you here with us. Thank you so much, and fest of luck through this period of Christina Hooper is Investco, Chief Global Market Strategist, joining us here in our interactive broker's studios. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram Woods. I'm on Twitter at Lisa Abram

woyds one. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio.