foxex: The Saudi Situation

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Monday's top stories:

1 - The U.S. and Saudi Arabia's relationship is tested

2 - The federal deficit grew… a lot!

3 - Amazon makes a predatory move

4 - Chart: S&P500 at a risky, long-term technical level

U.S. markets ended the day slightly lower overall.

Final Numbers:

DJIA: - 0.35%

S&P500: - 0.59%

Nasdaq: - 0.88%

#1 - The Saudi situation
Rising tensions between the U.S. and Saudi Arabia over the disappearance of journalist Jamal Khashoggi are making their way into U.S. and global markets. We won't get into what may or may not have happened to Khashoggi and who may or may not be responsible. That's not our turf and we honestly have no idea or insight.

The incident does bring into focus the careful balance the U.S. and the Saudis try to maintain and the potential fallout should things fall apart. The threat of economic sanctions put on Saudi Arabia by the U.S. was enough to push the Tadawul, the Saudi stock market, down 6 percent over the weekend. The threat of Saudi Arabia curbing oil exports in retaliation to the retaliation is enough to shake oil prices off their recent climb. What is certain is that the "oil for security" relationship between the U.S. and "Saudi America" is being tested in ways we haven't witnessed in decades, and the outcome will certainly impact investors, especially if doesn't end well.

Why it Matters:
Saudi Arabia has been a key ally to the U.S. given its vast oil reserves and its geographic location in the heart of the Middle East. Here are some key facts and points to keep in mind:

Saudi Arabia has the second largest concentration of proven oil reserves on the planet. It also has 18 percent of the planet's proven oil reserves and is the largest exporter of petroleum.
Petroleum accounts for 50 percents of the country' GDP and 70 percent of its export earnings, totaling nearly $160 billion per year.
It's a founding member of OPEC and can control the price of oil, and therefore gasoline, by tightening or loosening its oil production.
With Iran facing economic sanctions imposed by Washington and its allies, Saudi Arabia has been able to keep oil prices stable and growing even with Iran out of the picture.
Saudi Arabia is the tenth largest holder of U.S. Treasuries, and it has been steadily building those holdings over the past two years.
Oil prices have a direct impact on gas prices, and nothing gets consumers' attention more than higher prices at the pump.

Sources: OPEC, Treasury.Gov

What's Next: The U.S. and Saudi Arabia can't afford a crisis that threatens either country or their interests in the Middle East and around the world. The Saudi Royal Family and government (They are one and the same) have extremely deep pockets with major investments in U.S. companies, U.S. debt and U.S strategic interests. The U.S. has been defending "Saudi America" and its allies since oil was first discovered in 1938 in what is known as the Dammam oilfield. President Trump seemed to accept Saudi's King Salman's denial of any involvement in the alleged murder of Khashoggi, at least for now. There are reports suggesting that Khashoggi recorded his murder through his Apple watch or other means, but the economic and security interests that bind the U.S. and Saudi America together are likely too strong for that evidence to ever see the light of day, if it exists.

Read more:

What Is the Saudi Stock Exchange?

OPEC vs the U.S.: Who Controls Oil Prices?

What Determines Oil Prices?

#2 The deepening deficit
This shouldn't come a surprise to anyone, but the federal budget deficit grew to $779 billion, or $113 billion higher than the previous fiscal period, according to the Treasury Dept. That's a 17 percent year over year increase, if you are keeping score. The budget shortfall (The amount we spend versus the amount we take in through taxes and other means) climbed to 3.9 percent of U.S. gross domestic product.
Read the Statement from Sec. Mnuchin here

Why it Matters: The U.S. hasn't had a budget surplus since Bill Clinton was President. The fact that the U.S. has had a budget deficit every year since then has had seemingly little effect on economic growth and markets. We spend more than we take in, almost always. This is the problem that continues to get kicked down the road to future generations who will have to deal with massive cuts to government programs like Social Security and Medicare. The recent tax cuts that are now the law of the land in the U.S. are only going to widen the deficit. We know these things, but we do not rally our political will around lowering the deficit and running a more responsible government. If you ran this kind of budget in your own home or your business, you'd likely find yourself homeless and out of business -- but that's not how it works in Washington. Tax cuts and government spending prime the economic pump by making us feel richer than we are so we will spend more, which drives unemployment down and stock prices up. Unfortunately, less than half of adults in the U.S. invest in the stock market and most of the employed masses haven't seen real wage growth in decades.

What's Next: More deficits, of course. Most Americans will benefit from the tax cuts next year, especially the wealthiest ten percent. They are not too keen on plowing their largesse back into the economy except for making expensive real estate and luxury purchases. President Trump is likely to focus on major infrastructure spending in the next two years of his term. He promised that on the campaign trail and we need it, to be honest. That spending, which some have estimated to be near $1 trillion over two years, is not something we have been saving up for. It's going to be straight deficit spending that will swell the national debt and burden future generations in unknown ways.
Read more:
What is the role of deficit spending in fiscal policy?
Debt Vs. Deficit: Understanding the Differences
How long has the U.S. run fiscal deficits?

#3 Amazon got a Shark in the Tank

This is one of those ideas that just makes sense… Amazon and the hit TV show Shark Tank have partnered to make products featured on the show available in a Amazon store. The reality show, featuring billionaires like Mark Cuban and multi-millionaire entrepreneurs and executives like Barbara Corcoran, is in it's tenth season, and claims to have revitalized entrepreneurship in America. That might be a stretch, but it is vastly entertaining to watch entrepreneurs and small business owners pitch their ideas to the Sharks who pull no punches with their feedback and are willing to put up their own money to fund some of these ideas in exchange for ownership.

Read the Amazon/Shark Tank press release

Why it Matters: Amazon is creeping deeper and deeper into our lives across every screen, channel and platform. It announced a deal with Snapchat a few weeks ago to allow users to buy items they like in user stories via a feature called Visual Search. Too easy. Amazon also produces millions of hours of its own content now as well, through Amazon Studios. Some of it is very good. Do you like the sweatsuit that John Krasinski is wearing in Jack Ryan? Amazon's drone will deliver that to your door in 10 minutes. You see where this is going.

What's Next: Amazon already beat me to it. In the press release announcing the Shark Tank deal, Amazon cleverly adds that any eligible Shark Tank entrepreneur is eligible for $15,000 worth of credits for Amazon Web Services. Smart… Very smart.

The Net Worth of the Shark Tank Cast

3 Shark Tank Failures That Made Millions

Chart of the Day: S&P 500 at a risky, long-term technical level
We don't usually post technical analysis using the long-term monthly chart of the S&P 500, but the global research team over at Bank of America Merrill Lynch made a compelling argument using just that chart on Monday. BofAML pointed out some key developments surrounding the market's current risk environment from a technical perspective.

As shown on the S&P 500 monthly chart below, the price of SPX as of Monday is sitting just barely above its rising 12-month moving average. The fact that price is above that moving average at all is a good thing – it provides some technical basis that the overall market on a long-term basis is still in a bullish, or rising, trend. The bad news is that price has dropped down to converge with that moving average, something it hasn't done since the market turbulence of 2015-2016.

Similarly, the monthly MACD indicator is still showing a bullish signal, as the MACD itself remains above its signal line, keeping the MACD histogram slightly positive. As with the moving average, the monthly MACD for SPX was flashing sell signals during much of the volatility seen in 2015-2016. The problem now, though, is that the MACD looks dangerously close to converging and potentially going negative.

So what does this all this mean? From a technical view, the market's still in an uptrend, but only barely so. BofAML warns that any monthly price close for the SPX below its 12-month moving average, combined with any new MACD sell signal, would increase the risk that the market's long-term uptrend could sputter like it did in 2015-2016, or worse, reverse into a full-fledged bear market. Though technical indicators are far from infallible, it may be a good idea to heed potential risk signals like these, especially when market uncertainty rises as it recently has.