Wed Sept 23, 2015
Again there are three stages of a bear market, denial, acceptance, and capitulation. Yesterday in intermediate accounting one student asked if, and I quote, if there was any hope for energy companies. Now that is a perfect example of social mood approaching capitulation, i.e., give up. At that point investors toss otherwise valuable shares of companies overboard swearing to never be involved again.
As Tom McClellan points out in his latest report, it is helpful to examine oil priced in something other than dollars. Or as our friends at Elliott Wave would say, real money like gold. This chart does just that.
Crude Oil Priced in Ounces of Gold
This ratio chart divides the price of oil by the price of gold. If one then multiplies the right hand scale by 100, we have the number of ounces of gold required to buy 100 barrels of oil.
.04 x 100 = 4 ounces of gold, the left side would be likewise multiplied, instead of one barrel, oil is priced in barrels, we have one hundred barrels.
To make the point I put the price of XOM Exxon Mobil on the bottom panel.
The investing point is that the ratio chart has already reached a third important milestone since 1999. In 1999 oil fell to $12. And that was the time to buy XOM just over $20. The weakness in the stock market and continued over supply of oil along with bankruptcies and take overs in the oil patch will not doubt drive energy shares lower. As noted, many service companies are already below book value.
But the ratio chart strongly suggests the alert investor should be on guard for a final low in the oil price.
Overall stock market weakness here may not translate into energy share gains but one might certainly benefit from an investment in USO which tracks the oil price. This ratio chart lines up with our expected low in commodity prices at year end.