Many people do not enjoy volatile experiences. Personally, I get a bit uncomfortable around others who display aggressive behavior, usually something involving yelling. People who drive in a reckless fashion also are disconcerting. Each person has their own turnoff, and in many cases, volatile is an accurate description in some way. As it relates to finance and markets, the same holds true. There are far more investors who hate volatility than those who embrace it. This week was a textbook example of volatility if you accept this definition: the degree of variation of a trading price series over time as measured by the standard deviation of returns. (Wikipedia). So what transpired to cause the volatility?
Thursday, ECB head Mario Monti made the decision to merely extend quantitative easing, as opposed to increasing it by $20 billion per month. He also decided to raise the cost of depositing capital with the ECB to 30 basis points, versus 20 previously. Well, the currency markets completely missed it, the euro jumped against the dollar, and any position long the dollar (short the euro), pretty much a one sided trade, suffered immensely. Equity markets fell badly, and going into the November jobs report gloom and doom prevailed. When the much anticipated employment report was released the next morning, the expectation was for 192 thousand jobs, but the number came in at 211 thousand. The result puts the final nail in the coffin for the Federal Reserve to raise interest rates in a couple of weeks. Certainty of the Fed decision helped provide clarity to domestic equity markets, which had their best day in a few months. So, with a few weeks left in the year, at least we now know lift off is taking place. Don't you feel better?
Heading into 2016, one area which continues to be under pressure is energy. This week, OPEC declared at a semi-annual meeting they will hold their production targets steady at 31.5 million barrels per day, and expect the surplus to retreat to approximately 700 thousand barrels per day, less than this year's average of 1.8 million bp/d. The excess oil will take more time to work off, and the speculation of distress in high yield bonds and potential merger and acquisition activity is all based on oil prices remaining subdued. If the dollar remains strong, it could also adds a headwind for a price recovery. For owners of oil stocks, we are getting there, and the commodity sector is notoriously volatile. Imagine that, there is that world again.
In other areas of capital markets, Uber raised even more capital and at a valuation of, as I shake my head, 62.5 billion. Glad it is their money and not mine. McDonald's (N:MCD) raised $40 billion bucks in a bond offering and paid sub 5% for the debt. I'm sure investors are lovin it, as judged by the fact Mickey D's is not separating their company into a Real Estate Investment Trust and the equity has moved higher. Whether all day breakfast remains a success is an entirely different question.
Yahoo (O:YHOO)'s board met the last three days to make decisions about what course to pursue in order to improve shareholder value. Will Marissa stay or go? Stay, I say. Will they pursue the Alibaba (N:BABA) spin? Win with a spin, I say. Do they keep their current businesses in tact? Yes, see the question about Marissa. When you play a poor hand well, and the potential for a better hand could be coming, you don't change the player, just my two cents.