9/20/19 – Stocks Pullback in Busy News Week

Markets opened Monday following the weekend drone attacks on approximately 50% of Saudi Arabian oil production. Oil jumped as much as 20% early Monday, before settling down throughout the rest of the week. Equity markets were remarkably calm given the sharp move in oil and the geopolitical ramifications of the attack. Yemeni rebels claimed responsibility, but pretty much everyone believes Iran was behind the attack. Later in the week the Fed cut interest rates again by 0.25%. Markets were happy, although stocks didn’t react strongly either way. I continue to believe the economy doesn’t need interest rate cuts and worry this merely hurts savers by lowering fixed income yields and bank interest rates. For the week, the Dow declined 1.0% while the S&P 500 decreased 0.5%.

Following the Saudi oil field attacks, the initial public offering (IPO) for Saudi Aramco was put into doubt. So far, the country is pressing forward with planned investor meetings that take place in the 1-2 weeks prior to pricing. I find the idea that Saudi Arabia wants to sell a portion of Saudi Aramco to public investors very interesting. Currently Saudi Arabia gets 100% of the profit from the oil giant. They claim a very low cost of extraction, so the company should be highly profitable. Why does the government need an infusion of cash that would come with an IPO? Why wouldn’t it prefer to retain 100% ownership?

It makes me wonder if the Saudi Arabian budget position isn’t a strong as it needs and/or its oil company isn’t a valuable as they want to convince investors. Already stories are surfacing that wealthy Saudi families are being pressured by the government to buy shares in the IPO. The timing of the drone attacks raises the question of whether Iran was trying to disrupt the IPO. Maybe Iran believe Saudi Arabia needs an infusion of cash in the near future and wanted to disrupt that. Read More

Oil increased 5.8% this week to close at $58.09/barrel. The yield on the 10-yr Treasury moved sharply lower, closing at 1.73%, from 1.90% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 3.73% from 3.56% last week.     

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