Friday October 10, 2014
Word Count 829
A Social Mood Shift for The Fall
Wednesday and Thursday marked the biggest one day rally and worst one day drop for the Dow Jones Industrial average (^DJI) for all of 2014. That’s the first time those extremes have been hit on back to back days in nearly 17 years.
Jeff Macke, Yahoo Finance
Taken together, oil and stock prices are more likely to fall in tandem than for falling oil prices to stimulate stock prices. That is my minority view for what it is worth. This December will mark the 40th year anniversary of the low in the Dow Industrials at 577. I suggest this might be a good time to be watching stock and oil prices, from the sidelines.
Dennis Elam in One on One, Sept 9, 2014
You can’t say I didn’t warn you….
This past week has seen volatility in stock prices reaching multi-year extremes. Moves, which used to take three days, now occur in one day. No doubt high frequency trading is the root of some of the up 250 Dow points up one day and then down the next. But October has a deserved reputation as a crash month. The meltdowns of 1929, 1987, and 9/11 all occurred in October. So here we are again.
Today we address the real question, what happened? Oil prices were triple digit just weeks ago. Stock prices were on a tear amid cries of a new bull market from even long term observers. Now oil prices are down $20 and headlines report energy stocks are being crushed. The change is not so much in the market fundamentals but in the social mood of investors. Social Mood finally caught up with the reality of sky-high markets. Let’s examine this phenomenon.
Social mood motivates social actions. Conventional wisdom has it that individuals are acted upon by the news, and then make decisions. But social mood is unconscious and internally regulated. For example, the price of oil in the spring of 2013 was $87.50. By August it hit $112.50. That is an amazing 28% increase. Did world demand increase 28% or did the supply fall by 28% in those few months? No, but the social mood of the participants certainly expanded that much. If I have learned anything writing these columns, it is that the price of oil has little relation to supply and demand.
Last week I remarked on attending a conference on the Eagle Ford Shale play. I noted no one discussed the falling price of oil. Another large conference is slated for next month in Midland on the Permian Basin play. Regardless of a string of correct predictions in this space, my telephone is not ringing with an invitation to speak. The reason is that my views do not fit the social mood of the organizers.
The S & P 500 soared from 1920 to 2020 in less than two months since August. Then, like Wiley Coyote chasing the Roadrunner over the cliff, social mood went in reverse. The S & P index is now testing the exact it low it up in during August. But by the headlines one might think it was Black Tuesday in 1929. The explanation is that social mood moves in fractals. The mood can be massive compared to the actual price change.
Finally headlines are reflecting my long-standing skepticism over the durability of triple digit oil prices. One analysts reports that ‘if ‘prices drop another5 $4 or $5, companies will be forced to trim their capital budgets.’ (Emphasis added) I find the prediction of Robert Baird and Company intriguing that ‘prices could drop to $53 in certain parts of the Permian and Eagle Ford and still be profitable to drill. ‘
To which a student of social mood can only reply, fat chance of that. Rather the more reliable prediction is that at some point on the way down, the social mood switch will be thrown from wild optimism to just plain fear. Capital budgets will not be trimmed; they will be slashed. No one really knows the minimum price at which frocking enjoys price support. But I will bet few to no industry players will hang around to find out just where that break-even point may be.
And why is that? Finally, social mood arises when humans interact socially. The process appears to be related to the herding impulse. It is all so typical that joyous celebrations, billed as conferences, on the Permian and Eagle Ford would be planned just two months apart. And it is just as likely they would be planned at the very pinnacle of positive social mood on the topic, After all extreme expression of social mood tends to occur near the end of a trend, not at the beginning.
Learn more about social mood and its outcomes at http://www.themarketperspective.com.
Dennis Elam is an Associate Professor at Tx A & M SanAntonio.
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