Commodities, Credit, and Capitulation

The fairytale told in early 2015 was that a collapse in the price of Crude Oil and other commodities was going to be huge boon for the U.S. consumer, the economy, and the financial markets.

In the past month, as we have witnessed multi-year lows across the commodity space, the story seems to have changed. The decline in commodities is now being viewed as a harbinger of a slowing global economy, wreaking havoc on financial markets.


What did the Pollyannish forecasts at the start of the year miss?

1) The impact of declining commodity prices on S&P 500 earnings, which have now declined (YoY) in each of the last four quarters.


2) The impact of declining commodity prices on the credit markets, particularly at the lower end of the credit spectrum.

-CCC high yield bond spreads are at their widest level since 2009.


-Distressed Bonds have lost more than half of their value since their peak in 2014.


3) The impact of declining commodity prices on the currency markets, particularly in Emerging Markets.



Capitulation is defined as the action of surrendering or ceasing to resist an opponent or demand. In investing, capitulation is a good thing as it often coincides with a wave of selling near the end of a decline.

The challenge is in differentiating between capitulation that marks a short-term bottom from one that marks a cyclical or secular low. Unfortunately, there is no easy rule to follow.

There are some real signs of real capitulation today in the commodities market. Fears of further declines are heightened and most seem to be in agreement that these declines will negatively impact financial markets. This is a very different picture than the start of the year when the consensus view was overwhelmingly sanguine.

The question for investors is whether stocks and bonds, which are supposed to be forward-looking, are already discounting a further collapse in Crude Oil and commodities.

The bullish spin: the market is already pricing in a default cycle from the commodities crash and any stabilization in commodities from here will act as a positive surprise. The collapse in commodities is not indicative of a demand issue and the U.S. will not be pulled into recession any time soon.

The bearish spin: financial markets have only just started to appreciate the dramatic impact of the commodity collapse and if it is indeed signaling a global recession, further declines will follow.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of three award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors  and previously held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.


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