The Market Perspective

Overcapacity

Friday Oct 23 2020

Overcapacity All Around

Things are better than they were but far from sustainable.

Vasu Raja, American Airline Chief Revenue Officer

That is the case everywhere one looks. Southwest Airlines lost $1.2 billion in the third quarter while American AAL doubled that loss at $2.4 billion. American has a negative book value and net debt of $24 billion. The end result is most likely dissolution and break up. Bear markets clear out the excess speculation of previous bull markets. The problem is simply that the US (world) is on the downside of the business cycle. We have previously noted that only the US stock markets have made new highs earlier this year, the rest of the world did not. So what happened?

From the March 2009 low, social mood turned positive for a ten-year boost in the markets. Positive social mood coupled with low FED induced interest rates prompted multiple industries to expand capacity, a lot. Retail strip centers, movie theaters, air and cruise lines, hotels, stadiums, and airports themselves all expanded. Now airlines are retiring planes. The problem is that they cannot retire the debt assumed to fund the expansion.

Schlumberger SLB peaked in 2014 at $95 along with $100 oil. Today SLB has its shale fracking unit for sale and trades at $15.30. The largest movie theater chain is AMC Entertainment Holdings. It’s $1.4 B bonds due in 20206 are trading for less than ten cents on the dollar. That sounds more like liquidation than reorganization.

Everywhere business is trying to operate on limited or reduced capacity. But 25% utilization won’t support 100% of the former fixed overhead. The Hilton and Marriott here in San Antonio each have 1,000 rooms to fill. Filling 25% of them won’t make any money. Unnoticed re the big bets cities and counties have made on now near empty airports and sports stadiums. Fast food chains with drive in windows will survive but smaller family owned dine in restaurants cannot continue on curbside take out.

Everyone who is positive on stocks is really positive on a small sliver of the market which is big tech.   We noted last week that AMZN is trading at an eye-popping 122 price earnings ratio. But that is cheap compared to the real Wall Street darling, Tesla. Tesla trades at 800 times forward earnings. Its market capitalization is five times the combined value of Ford and GM. It would have to take over the American car industry to justify such a valuation.

The markets continue at high levels buoyed by tech stocks trading a valuations typical of past market peaks.   I doubt markets will move much between now and the election. Stay cautious.

The Market is Weaker Than You Think

Wed Oct  21 2020

 

After a  68 point rally in the NYSE the NYSE closed lower than it opened. This is how a bear market progresses.  Each rally makes the bulls believe the worst is over but in reality it is just beginning.  Note the close below the  200 bar MA.

Industrials

 

After a 180 point intra day rally the Industrials also closed lower on the day.  No doubt most are writing this off as pre election jitters, but the markets have a habit of looking ahead. I see nothing good for anyone in a Biden Presidency.

In today's WSJ Stanley McRaven, retired four star Admiral, UT Chancellor and graduate, noted he is pro choice, pro 2nd amendment and voted for Biden. This is what happens when Trump insults Generals Kelly and Mattis. If you lost McRaven, I suspect you have lost the election.  Four years later there is no one left to speak for Trump but his kids.

Presidential Uncertainty

Wed October  21 2020

This morning an analyst on Maria B show suggested we would not know who the President would be after the election. That is probably right,

Tech has been hot but most of the market is in bear territory.  Maria also had the CEO of Delta Airlines. He suggested it would be three yearts to get his industry back to where it needs to be.  I would suggest the world markets are not concerned with where he thinks he industry needs to be.

The better guess is that debt laden airlines like American will be broken up and disappear. SW Air will survive, Delta may but as a smaller entity, think New Orleans after Katrina.

We really have a two tier market. Tech is hot and its heavy weighting make is appear the market is bullish. But

Airlines

Hotels

Restaurants

Airports if they reported return on fixed assets

Stadiums

Energy

Energy Service

Casinos

Professional Sports

Shopping Malls / Retail

Broadway

Performing arts

Theaters

I doubt  eeven  5% of our TAMUSA student body have ever seen a live play. There is nothing to come back from in that situtation.

are all in bear markets. The purpose of a bear market is to clear out all the deadwood and non producing assets from the previous bull market.

that is happening now.

Markets Decline, The Start of a Larger Trend

Tuesday October 20 2020

The NASD NDX contains the FANG stocks which have powered those and so many other indexes since March. So let's take a look

 

Looks like peak momentum occurred Sept 2. That was likely the final end of the A B C correction dating from the late March low.

In that case Wave one ended later in Sept. Wave Two up ended at the underside ot the upslope trend line. This is often the case as a market reaches back to attempt a recovery and does not make it.

Momentum is waning in RSI at top and PMO at bottom.

The DJIA dropped 410 points Monday.

It appears the Industrials are tracing the same pattern which is more visible on the  24 minute chart.  The big move from March  28 topped early Sept, wave one down later in Sept and then Wave 2 up.  Now a third wave appears to be getting underway which explains the  410 point drop.

Proxy Stock Cullen Frost Bank

We think CFR is much more representative of what is going on than the FANG stocks. the strong rebound from the March low finally took CFR over the 200 day MA and then it quickly faded. It has not done so since.  Yesterday it droped 2.45%.

If the economy were on the mend the opposite would be happening.

CFR 240 minute chart is following the pattern of the larger indexes shown above.

the fact that rates are beginning to rise should be favorable to banks. But bank stocks are falling.  This is warning of increasing stress brought on by years of assuming heavy debt loads at all time low rates. American Airlines is a perfect example.

AAL

 

Apple has the same lower high pattern. I read Buffett dumped his  $800 M in apple shares, who says he is not a market timer?

Howard Davidowitz

https://www.financialsense.com/howard-davidowitz/retail-plunge-trump-presidency

 

has been predicting for years a crash in retail stocks. He calculated the retail square footage per person in the USA and concluded it was far too high. The reality of Sears and JCP and Macy's et al speak to the accuracy of that prediction.

I would say the same is true for airlines. The move to Zoom and Webex has accelerated that decline.  We simply have more airline seats than are needed.  The growth of air terminals have paralleled the growth of sports stadiums. Both are financed by public money and now all are in trouble.

Connect the dots.

Fewer board airlines

Fewer hotel rooms are rented

Fewer at restaurants

Less revenue for airports

Less taxi and dry cleaning business

No big shows or conventions in Vegas

Broadway is closed in NYC

 

 

this weekend we noted Transports and Small Caps were falling,that was the prequel to the broader fall Monday in other stocks. We also noted TBT a bear  bond fund was advancing.

Interest Rates

Jerome Powell could not be more wrong in his belief rates will stay low.  Here is the proof. Rate have climbed above the  200 day MA for the first time since later 2018.  Once it turns this market has a habit of not looking back. Which is to say the increase in rates is likely to accelerate much faster than the gurus at the FED think possible.

 

Tech Sway on Markets Nears Record

Monday Oct 19 2020

Page B 1 WSJ today

The markets continue to advance on the overweighting of tech stocks.

We noted in our column Friday that AMZN now trades at a p/e around  130. The other techs are around 33 50% higher than the overall market.

One might say the market is bubbling up!

Eenergy Shares Still Falling; Gold Silver in Fourth Wave

Weekend oct 18 2020

Chevron now has a larger market cap than Exxon due to worries about Exxon's dividend which is now at 10%.

But even CVX looks pretty weak, see below.

CVX never topped the  200 day MA in red and is now falling below all four.

Valero - looks about the same VLO is a large refiner

Nustar owns multiple pipelines and storage facilities'

All three are below their moving averages and still falling. I suspect the dividend for NS and VLO is in danger as well.

Gold is in a fourth wave pattern.

Daily Gold

PMO is in bottom position and price is trending along the  87 day MA. 

silver Daily

 

Silver is doing the same. Again PMO should be monitored.

Transports and Small Caps Diverge

Weekend October 17 2020

Transports and small caps lead the averages. Both are looking toppy

Transports

Small caps

Bonds - Interest Rates are Rising

TBT is probably a long term hold, iot advances as bond prices fall

the  20 year TLT bond fund is in the lower panel. With the ten year treasury at  .7% it is hard to imagine any lower rates, TLT looks to have peaked in early August

Pricey Stocks

Friday Oct 16 2020

Pricey Stocks, A New Crude Benchmark

 

The S & P 500 trades at about 22 times forward earnings, its richest price earnings ratio since the dot.com bubble.

Heard on the Street Wall Street Journal today

This statistic suggests stocks are at an extreme valuation. But bonds are the most expensive, therefore dangerous, they have ever been. The ten -year Treasury yields a mere .73%.   The last time rates were this low was after WW II. Should the economy finally begin recovering due to a successful vaccine, the yield might return to say 2.5%.   In fact this was the yield in early 2019. But if rates increased just that much, the bond holder would suffer a 16% drop in value. Bond prices move opposite interest rates.

After years of losses, investors have embraced Amazon as it re-invents shopping from home. Oddly Sears originally invented catalog shopping from home in the 1890s, now Sears is on the rocks. Here is an illustration of just how pricey some favorite stocks are now. Amazon is trading at a 128 price-earnings ratio.   That is six times the value of the overall market.

Facebook trades at 32, Apple at 36, Google at 34, NFLX at 91, and Microsoft at 38. So the FANG group is 50% more expensive with NFLX and AMZN being the outliers.  This is not to say prices cannot advance further. The overall stock market peaked February 12. These stocks are in the NASD which has made a new high, thanks to those stocks.

And the election is three weeks off. That may explain why stocks have ‘gone quiet’ this week.

Cushing, Oklahoma has been the storage point for   crude oil and the basis for pricing West Texas Intermediate. But the shale revolution and multiple new pipelines to the Gulf Coast are changing that dynamic. This new Argus benchmark will represent oil stored along the Gulf Coast.   It represents a combination of the East Houston Terminal operated by Magellan Midstream, three terminals operated by Enterprise Products and three offshore facilities in Houston, Seabrook, and Texas City.

Occidental Petroleum CEO Nicki Hollub remarked this week that American oil production will never again reach the 13 million barrels a day set earlier this year. She noted two mbd have been lost with decreased shale production. And the lockdown has gasoline demand much lower.

Unleaded gasoline futures have been unable to vault the 200 day moving average at $1.18. In the last three months natural gas futures have soared from $1.50 to $2.80.

I would agree that the Texas Energy industry cannot stand the Green New Deal. And that is why we do not hear much about it or Open Borders or Court Packing from Biden Harris. The election will be consequential.

dennislelam@gmail.com

Wednesday, Stocks Correct A Bit Or is This more Serious

Wednesday October 14 2020

CFR

My proxy stock for the real world, not FANG or TESLA, is Cullen Frost Bank.  After an August to Sept sell off it almost hit the  61.8% level adn now i s turning down in a hurry. It topped just under the  200 bar MA.

The action between here and the previous low of  62 will be most interesting. I think this is the 'real stock market.'

NFLX

Among the FANG stocks the early warning seems to consistently be NFLX> It dropped 2.3% droppoing this afternoon. at bottom MACD is topping and RSI at top as well.  The message here seems to be  the tech rally is about to correct as well. FB GOOGL AAPL MSFT all have the same look.

and for that matter INDU

 

there you have it banks, tech and the Dow all peaking and rolling over. That makes sense given the seasonal weakness of Oct and the uncertainty of the election.

But the 30 minute chart suggests one last trip to the upper trendline

that could happen but CFR NFLX and INDU all look toppy here.

 

Interest Rates and Stocks Trend Different than you Might Think

Tuesday Oct 13 2020

 

 

"Rates Down, Stocks Up"? Myth ... Busted!
Let's address widespread assumptions about interest rates and the stock market

By Elliott Wave International

There's a widespread belief that rising interest rates are bad for stocks and a lower interest rate trend is good for stocks.

The reasoning behind that belief is that bonds compete with stocks for investment funds. Hence, the higher the yield investors can get from bonds, the less attractive stocks become and vice-versa.

This assumption sounds logical, but in reality, stock market investors do not take their cue from rising or falling yields (or interest rates).

Yes, there have been times in financial history when rising rates have coincided with falling stock prices and vice versa. Yet, there have also been periods when stocks have risen as rates have risen, and times when lower rates have coincided with falling stock prices. A notable example of the latter in the U.S. occurred during the Great Depression of the late 1920s and early 1930s. The DJIA plummeted 89% from August 1929 to July 1932 as interest rates trended lower. Also, interest rates trended lower as the NASDAQ fell 78% from March 2000 to October 2002 and as the DJIA tumbled 54% from October 2007 into March 2009.

Even so, a September 2020 Financial Times column said:

Equity Investors Should Raise a Glass to Low Rates
This year, equity investors have been shouting "three cheers" for central banks.

Yet, the just-published October Global Market Perspective, an Elliott Wave International monthly publication which offers analysis of 40-plus worldwide markets, showed these two charts and said:

These two charts illustrate the fallacious, yet pervasive belief that falling interest rates are a big boost for stocks. Ten-year interest rates in Spain have dropped from 4% in 2007 to nearly 0% today. Yet the broad market IBEX plummeted almost 60% over the same span. In Portugal, 10-year rates were approaching 6% when the PSI 20 peaked at its 2000 all-time high. Rates surged to about 16% during the 2012 sovereign debt crisis and then crashed to 0.24%. Despite an overall decline in borrowing costs, the PSI-20 is lower today than it was in 2012, and shares are down an astounding 71% over the past 21 years.

So, it's a myth that the trend of interest rates determines the trend of the stock market.

Indeed, a review of financial history shows no reliable relationship between stock trends and any external factor.

However, the Elliott wave model's recognizable and repetitive patterns do offer predictive value for global stock market investors.

As the book, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter, says:

It is a thrilling experience to pinpoint a turn, and the Wave Principle is the only approach that can occasionally provide the opportunity to do so.

The ability to identify such junctures is remarkable enough, but the Wave Principle is the only method of analysis that also provides guidelines for forecasting. Many of these [Elliott wave] guidelines are specific and can occasionally yield stunningly precise results.

Ah, yes, "results"!

Isn't that what every investor wants?

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This article was syndicated by Elliott Wave International and was originally published under the headline "Rates Down, Stocks Up"? Myth ... Busted!. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.