Energy - Analysis

U.S. markets go down three percent in a week, the overwhelming sentiment has to be considered, at the very least, downcast. At worst, you might even call the prevailing approach 'Sell everything that you own.' Now, keep in mind, over the last 20 years, we have seen this movie before, actually, more than once. In 1999-2000, the market fell nearly 80% in some cases (the NASDAQ). In 2008, the market lost 45% and 60% from peak to trough in March of 2009. Yet, here we are again, with indexes at nearly record highs (about 5% from the top) and the fear still remains palpable.If we were to compare the current environment with 2008, there is not much which is similar. Back then, major investment banks, insurance companies, and commercial banks or thrifts, went bankrupt (Lehman, AIG, Washington Mutual, Wachovia). Today, the financial services sector have Tier 1 and 2 ratios with higher capital levels than ever before, which means their balance sheets are flush and have the capital to withstand lots of non performing assets. On yonder past, the housing sector was the major cause for overpriced assets being purchased by people who never should have received loans from institutions which never should have written them. Today, homeowners are put through the ringer with credit standards which make borrowing so difficult our ex-Federal Reserve chairman Ben Bernanke cannot get a loan for his humble abode. In 2008, the regulatory environment was, shall we say, a bit lax. Today, conversely, the best description for the fine, upstanding individuals who police financial and capital markets, would aptly be, 'Enthusiastic (overzealous).' Major corporations are in fabulous financial shape, incredibly profitable, and have businesses operating all over the globe in plenty of massive countries where they can grow organically for a long time. The biggest fear which exists is the belief that China, Europe, and emerging market countries are facing deflation. Commodities, especially oil, have sold off hard and it has contributed to the idea that we are now headed back into a global recession. Also helping fuel the fire is the prospect for end of the year redemption's by those entities whose clients are not, to be kins, willing to put up with sub standard performance. If we add in a warning from a company in the red hot semiconductor area, well, the week was not good if you are long.So, in what seems a never ending dilemma of moving from one problem area to another, with two and one half months left in the year, investors are staring in the face of a market which is clearly nervous. Earnings season approaches rapidly, but all eyes have to be on the energy sector. You see, with oil priced at $85 or $90 a barrel (WTI and Brent respectively), all of inland drilling in places like the Bakken, Permian Basin, or Eagle Ford shale complexes may get scaled back as the price to cover production costs just ain't high enough. It seems that, the best answer for low prices is, low prices.We should also point out what is happening in the capital raising world as it has larger repercussions for the corporate world. Three major activists, Bill Ackman (Pershing Square), Dan Loeb (Third Point), and Barry Rosenstien (Jana Partners), have all raised over a billion dollars for future use. You have to wonder what they might use the funds for, eh (hint, hint, maybe it could be to force change at companies which have attractive assets but sagging stock prices)?Last, but certainly not least, the midterm elections rapidly approach. The only area to pay attention to is in the Senate where Republicans have to hold what they currently have and also add six more seats in their column. Currently, it looks pretty positive as the states in question: Iowa, Louisiana, Arkansas, New Hampshire, Kentucky, South Dakota, and Alaska all favor the anti-Obama candidate by anywhere from 3-5 percent, with some variability in the margins. It would be nice to see Harry Reid be relegated to the minority party, although you could make a strong argument it would be better for the minority party than Republicans. You see, even some Democrats recognize obstruction has not benefited their grand party so well, contrary to those who actually run our lovely government.