Trader Talk

The new funk on Wall Street: Why stocks are down today

Spencer Platt | Getty Images

Why is the stock market lower today?

The Street has talked itself into a new funk. The basic theme is: lower for longer.

This theme is familiar to those watching oil, but this time the theme is broader.

Lower for longer not just in oil, but natural gas. Lower for longer in steel & copper & aluminum and other base metals. Lower for longer in global Industrial sales. Lower for longer in interest rates. And lower for longer in many emerging markets.

How long is "lower for longer?" It depends, but the general theme is that lower everything continues into at least the first half of 2016.

That doesn't mean that commodity prices—or corporate sales—will keep dropping. They don't have to for everyone to be gloomy. They just have to remain at these depressed levels:

Commodities in 2016

Oil down 31%

Natural Gas down 31%

Copper down 25%

Aluminum down 17%

Gold down 10%

Let's look at each sector.

1) Oil. Besides weak earnings, Energy stocks face the possibility of dividend cuts among big names if lower for longer continues into late 2016. Iberia Capital, speaking of Occidental's dividend, recently wrote: "If the lower for longer scenario plays out as many predict, a dividend reduction becomes increasingly likely."

In oil, the general feeling is that for an appreciable rise to occur either: 1) Saudi Arabia has to cut production, or 2) U.S. shale producers have to cut production, or 3) some geopolitical event has to occur that would cause oil to spike, or 4) the global economy suddenly gets better and oil demand improves.

Macquarie: "The IEA's most recent update suggests the global oil market is unlikely to balance NT [near-term] and lower for longer WTI appears increasingly likely."

2) In metals, the basic theme is capacity remains relatively high, though it is coming down. Deutsche Bank downgraded a bunch of steel stocks yesterday, saying they expect lower steel prices to continue into next year. Morningstar said that despite cuts in production aluminum capacity is still high, and that "This is a key driver of our "lower for longer" view on aluminum pricing. "

3) In Financials, there are two stress points: a) fewer rate hikes leaves less opportunity for banks to raise rates, and 2) lower for longer on oil increases the chances that banks will have to take writedowns on energy loans. Macquarie, writing about Bank of America but speaking generally about most banks, recently wrote: "lower for longer interest rates would cause a meaningful downdraft in consensus estimates."

4) In global Industrials, many expect the global economy to continue to be anemic into 2016. Baird reflected this in a recent report discussing Industrial firms like ITT, ABB, and Emerson Electric, saying: "3Q commentary suggested no signs of improvement in 2H15 as companies continued to slash both operating and capital budgets to adjust to the new lower-for-longer demand environment."

I could go on and on, but you get the point: "lower for longer" has now become a regular part of the Wall Street jargon.

How much of this is real and how much is just a short-term funk? We don't know. One thing is for sure there are an awful lot of bets that this will continue into 2016. If it doesn't, we will see some short, sharp rallies.

And the Fed? Oh, traders have talked themselves into all sorts of logical knots.

How's this one: Yellen is damned no matter what she does.

The argument is: if the data is good, she is going to raise rates quicker and the markets will have a tough time digesting that. If the data is poor, she will be less aggressive, but stocks will respond negatively to the poor data.

See what I mean? Damned either way.

Wall Street needs to stop drinking the Kool Aid and start drinking the eggnog.