I guess you’ve seen the Kuwaiti Stock Exchange (KSE) get smashed yesterday. Is it surprising? No. Let’s face it: KSE has rallied 47% from its lows this year, the US market (S&P 500) rose 40%, and Oil cruised up 115%. Why? We were heading on a one-way road to destination Armageddon until the printing machine in Washington DC decided to, well, PRINT. I mean PRINT a whole lot of money! This saved us from Armageddon and merely (yet significantly) changed the label on our economy from Great Depression to Great Recession. The problem is that many investors got over-excited and believed that we were done with the recession altogether! Green Shoots? God how much I hate this term. Dandelion weeds it is! As with any market event, investors are humans and they simply over-exaggerate the downside and the upside.
What I’m trying to say here is that yes we had a big down day in Kuwait, but we shouldn’t focus on the small picture. The S&P 500 had a big down day last Thursday because of dismal unemployment numbers. Oil prices tumbled 12% in 4 days in response to the weak jobs numbers, discouraging fuel inventory numbers, and a stronger dollar. Bloomberg had two similar headlines yesterday, “Oil has the longest losing streak since SEPTEMBER,” and “Kuwait shares slump most since SEPTEMBER.” I’m sure you figured the connection between the two headlines.
We have to look back and realize that Kuwait is part of an interdependent world. Sorry but we are a miniscule decimal number in the complex multi-trillion world equation.
Below is a chart comparing the performance of the KSE, S&P 500, and Oil since June.
(No Ratings Yet)
Loading ...Tags: Correlation, GCC, KSE, Kuwait, Kuwait Stock Exchange, Oil, S&P 500
I do not have the statistical data on hand, but the fact is that in general, WORLD MARKETS have correlated with CRUDE OIL for the better part of the decade. One explanation for that correlation may be the fact that oil majors make up a good chunk of the Western market indexes.
So I really cannot say our markets follow oil, although it is generally true that the higher the oil price, the bigger our revenues and budgets.
[Reply]
I wouldn’t say our markets blindly follow oil prices, but I firmly believe that we are a small boat in an ocean full of yachts. Further, when a systematic risk emerges in a major country (US unemployment #s etc), this wave ripples all the way to us and significantly affect us.
Many people were talking about company-specific reasons for the sell-off in the Kuwaiti market. Although I agree with some, I believe that the sell-off was sparked by systematic rather than company specific reasons.
As for oil prices, I guess one has to be fair and recognize that a rally from $40 to $60 turns turns a red fiscal budget to a delighful green one. Since government is a major player in the GCC, this dramatically changes the number of projects awarded to private companies and increases M2. It is crucial to recognize that a change in oil prices from $60 to $80 has a marginally lower impact than the $20 increase from $40 to $60.
P.S. welcome back dxb kola!
[Reply]
You mentioned how much you hate the term “Green-Shoot”
http://www.economist.com/daily/chartgallery/displaystory.cfm?story_id=13522034
The graph attached illustrates how much the word is being used in business articles every week. Its outdated though since it stops at April ‘09
[Reply]
Naser:
Thanks supporting and quantifying my hatred! I guess the peak in the usage of the word “Green Shoots” coincides with the peak in the market
[Reply]