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Operation Boomerang

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More than half of the S&P 500 stocks are down for the year, and 30% are in correction or bear market territory. What often happens in this scenario is that investors start to sell winners to pay as margin calls begin to mount.


As of May, investor margin debt stood at $669 billion, well above the $170 billion at the market peak in 2007. This kind of selling skews the market and creates a domino effect. It’s not about panic, but mechanical triggers that compound selling.

Selling Begets Selling

With that in mind, the NASDAQ is still near a double-digit return for 2018, extending a monster rally that arguably goes back to 1982, with the parabolic phase kicking in with a major breakout in 1991.

The current leg higher is approaching the long-term trend line.


The NASDAQ is just a reflection of big tech and consumer service names that have lost their luster, even as value propositions have gotten better. There’s been a never-ending string of negative news that all boils down to arrogance. In fact, these cool companies have lost the veneer of being caring and nice guys.

The campus settings, skateboard ramps, and fully stocked eating areas only mask otherwise harsh working conditions and ultra-demanding goals (only cult members could achieve with aplomb).  Apparently, the next big name that will have to face the music is Netflix (NFLX), where an upcoming article supposedly calls the conditions “bruising.”

Sometimes being big means accidentally bruising egos and knocking things over like a bull in a china shop. What’s really happening in the tech world is all about hubris. That said, I’ve never seen any valuation metric based on nice management. On the contrary, Wall Street likes putting its money where it’s going to work relentlessly.


The Disaster of the Day

One hit show on Netflix features a financial planner that must move his family from Chicago to the Ozarks after a money-laundering scheme backfires. Last night, the Bank of the Ozarks (OZRK) posted its financial results, and something backfired there as well. The stock got smoked in after-hours trading, down more than 16% after finishing the session off more than 4%.

This looks like a cautionary tale about ‘a big fish in a little pond’ moving to a large ocean to swim with the sharks. It’s also a huge red flag about construction building in America. In recent years, the Bank of the Ozarks became such a player that it began billing itself as ‘America’s top Construction Lender.’

The Bank of the Ozarks arrived in New York City in 2013, and this year was the third-largest lender, having doled out $6.0 billion in loans.

I didn’t listen to the conference call, but I did look over the financials and this line twisted my cap:

  • Provisions for loan losses: $41.9 million, +439%

This kind of development speaks to overbuilding in places like NYC, but it also should reverberate at the Federal Reserve, which seems to be ignoring all the weakness in the housing sector.

Earnings: Companies Posting Earnings

  • PayPal (PYPL) initially traded lower but made a nice reversal reflective of its solid results
  • American Express (AXP) edged higher on earnings guidance above the Street
  • Celanese Corp (CE) posted strong numbers with expanding operating margins (21.1 from 14.6), and management offered strong guidance - the stock is changing hands at price/earnings growth ratio (PEG) of0.62) and forward price-to-earnings ratio (F/PE) of   8.75. This is a cheap stock and severely oversold
  • Skechers (SKX) is always sketchy, but posted numbers that came in above consensus
  • Intuitive Surgical (ISRG) rallied more than $7.00 after posting earnings beat

Geopolitical Hotspots


Europe is walking a tightrope; the European Union (EU) experiment continues to be questioned and challenged, just as it did after the election. The outcome propelled Italy’s Northern League and Five Star (think Donald Trump and Bernie Sanders) into a shared government. The European Central Bank is trying to intimidate Italy.

I think the warning fell flat, although I understand there is no appetite to bail out another European country after the implosion that saw Greece hold financial markets hostage for months.


Much has been made of the yuan’s recent plunge, coupled with an imploding stock market that peaked in 2015. However, China has also seen its foreign reserves dip $200 billion after slipping one trillion dollars in 2017. I know the story of China being bullied into opening its ports through two Opium Wars and having to go hat-in-hand to western nations for funding to put down the Boxer Rebellion.

I get that it propelled the Mao revolution, and it is still talked about today. Many in China see the United States trying to force a trade on different terms. Nonetheless, the leaders of China know better, and they understand the stakes. Sure, they have 100-year plans, but they have regular life expectancies that have already been strained by mounting financial issues:

  • Capital Flight
  • Debt Bomb
  • Income and Wealth Inequality
  • Credit Crisis

The country’s human rights abuses are also becoming major stories again. China may fancy itself the ultimate replacement at the top of the heap, but its economy is too rigid, and there is too much corruption for the yuan to ever be the world’s reserve currency.


Perhaps I’m underestimating the need to save face over the need to save the long-term dream of global economic dominance.

Saudi Arabia

The truth is coming out, and it’s ugly and horrific. The murder of Jamal Khashoggi will be headlining for some time, and the United States will have to dish out punishment.

The royal family will have to take this punishment and try to use its acceptance as further proof of its maturation as a nation. The Crown Prince will not be removed, and Saudi Arabia will not toy with oil prices.

By the way, we still get a fair amount of crude imports from the Organization of Petroleum Exporting Countries (OPEC) and Saudi Arabia.

Saudi Oil Imports to the USA

Bond Yields

I believe the 10-year bond yield has hit its highest point of the year and will probably settle into a range that sees support at 3.10%. That would be fine for investors that are otherwise worried about the Fed more than other implications of higher rates.

I would like to see the Fed quell some of the growing anxiety over rates soon. There will be opportunities since these chatterboxes seem to speak somewhere in the world every day.

Game Plan

Folks, we are combining all our open positions to make hard choices that will allow us to raise cash to take advantage of the most oversold names that can rebound the quickest. There is an amazing opportunity out there, as most of the market is oversold.

I still see a year-end rally, so be ready.


Today’s Session

The markets look poised to open in the green after the Dow losing 300 points yesterday. A note out from JP Morgan suggest that a bounce is not only possible today, but it could continue into next week.  The rally in China stocks overnight, up 3%, should help our markets as well.

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