Thursday Dec 24, 2015
Note to readers I am posting as I compose over the long weekend, check back for more updates between now and Monday.
Peter Atwater who is an alum of the Social Mood Conference, also thinks oil is a likely buy here
The crude oil price situation continues to worsen; the October monthly average posted West Texas Intermediate price remained above $40, and in fact was slightly higher compared to September. However, the November monthly average fell below $40/barrel and the daily posted prices have now fallen below $35. The regional rig count slipped below 200 again in October at 193 (the monthly average for RRC districts 7C, 8, and 8A), and has continued to decline since then falling below 180. That’s the lowest since January 2010 – when the rig count was on the way up following the recession-induced decline of 2008-2009.
The Texas Permian Basin Petroleum Index continues to reflect the deep contraction in regional oil & gas activity falling sharply again in October to 266.1 down from 277.9 in September, and down over 30% from the October 2014 index of 381.4. (And again, the Texas Permian Basin Petroleum Index monthly values are continually adjusted and revised over time to reflect revisions in regional oil and gas production and estimated industry employment.)
All this to say there is no end in sight. The recently adopted mantra of ‘lower for longer’ is rapidly evolving into ‘even lower for even longer.’ At some future point declining production will cross paths with rising demand and the price will stabilize and begin to rise. That point is not right around the corner, however, and presently the most optimistic prognostications suggest some measure of “meaningful” price recovery in the latter half of 2016.
I received this nine days ago. It was written by a a fellow who will remain nameless here but has been respected as THE authority on oil prices in the Permian Basin. In this space I have been warning that an important low would probably happen in the near future.
Our point is, market lows happen amidst massively negative social mood and this excerpt above is just that, contrast it with Peter Atwater's Fortune Magazine piece listed first. It is now Sunday Dec 27. I am still reading nothing but gloom and doom regarding energy prices. It may well be that prices dip again in January testing the prior lows in the $34 range. But by the time prices move over say $44 to really start to reverse the trends the real bargains will have vanished.
Stocks
Transports
This is admittedly hard to see. But today generated a daily buy signal in the PAR SAR. The Transports would require a huge rally back to 9200 along with an Industrial rally to a new high. The Transports have been falling with lower fuel prices. Its it possible the Transports would rise with higher fuel prices? Yes that sounds counter intuitive but the markets have all been falling with lower oil prices. The Middle East, Africa, Venezuela can not stand oil prices this low. An article in the WSJ detailed that the Saudis would literally run out of money if this continues for long, they have an institutionalize welfare featherbed state. So this bears watching. The Transports have been the key in the market breaking down this past year. This chart shows the transports all the way back to their Nov 2014 top for perspective.
IYT
IYT is the ETF for the Dow Transportation Index. After four straight days of advance, it is possible it pulls back this next week. 148-150 seems a reasonable target. Yes we have been predicting a bear market along the lines of the 2000-2002 affair. That time period saw many swings just like this form over sold, now, back to overbought and then down again. I expect that will describe Year 2016.
Industrials
The industrials are in a fifth wave to the upside. This will easily carry into January. The question is how high will the Transports go? A buy signal has not been generated in the IndustriaLS but I suspect will be.
The weakest week of the year is typically the week between Christmas and New Year. Trading slows and the 'locals' have the upper hand. With Christmas on a Friday we have a perfect week set up. With light trading this next week we should be able to establish some new positions at favorable prices.
Bank Stock in Focus Cullen Frost
We heard Frost CEO Dick Evans speak at Financial Executives this past month. He mentioned that Frost was the only one of the top ten banks in Texas to emerged without a take over or merger from the 1980s. We also mentioned that CLF may well be the very pulse of the markets the next two years. I am buying here. Analysts on CNBC earlier this year warned of energy loan woes which Evans denied. I think it is a buy here and at this price pays a 3.5% dividend.
Energy
Exxon Mobil Long Term Chart
I don't know how much money one hundred dollars a month invested for the last thirty years in exxon would be but... This is a monthly chart and the MACD in the lower panel looks to be giving a buy signal or at least it should in the near future.
let's not lose sight of the fact that XOM is the 800 pound energy gorilla in the room. This looks very positive for the energy sector.
Energy Service XES ETF
This chart of the energy service XES also suggest we are close to a major major low. The MACD is lower than at 2009 but the price is higher, what a divergence. Again the very long term MACD in the lower panel is the same as XOM.
XLE Energy Weekly
XLE is also back in a support area. Taken together, XOM, XES, XLE confirm bottoming action.
Here is an analysis on MLPs
AMLP Buy Low!
AMLP has given back all the gains since its inception. But one would also have the dividends since that date. AMLP had a huge bounce this week no doubt some short covering but as the article says we seniors have been buying shares on the decline. AMLP appeals to me more than buying a few MLPs as this is the ETF of MLPs.
Freeport McMoran FCX
FCX was a $37 stock as recently as early 2014. They are having difficulty with the Indonesian Government and copper prices have been beat down.
Floserve FLS
I think FLS is a buy here.
Natural Gas GAZ
With all the excitement in oil, I have not heard natural gas mentioned. Here is the futures chart and indeed nat gas finally got a weekly close over $2. GAZ is a futures fund that buys front month gas contracts. That explains how it fell so much further than the price of gas itself. I will be researching this one but surely there are some bargains in this sector. GAZ is in the lower panel
The Social Mood for Energy
Just finished Christmas Dinner, will update this site with more bottom of the market suggestions tomorrow
The weekend WSJ has more articles like the excerpt above.
This is excerpted from an article Energy Companies Gird for Weaker Prices in 201615. My take is that after the company write downs AND the stock market write downs, the companies are now trading at or below what they are really worth. None of them were trading at real value with oil over $100.
We suggest examining ETFs like AMLP for master limited partnerships, Floserve FLS, Freeport McMoran FCX a sort of one company ETF for copper and gold and oil, and then take a look at a few Eagle Ford and Permian Basin plays.
MV Oil Trust is probably short term overbought and could pull back this next week.
The best bet on Eagle Ford Permian plays if probably FRAK. Click the link for a list of holdings, all pretty strong players.
This price is a new all time low, FRAK originally came to market at $24 in 2012, rose to $34 and now trades for 41% of that high. I grant you the trend here is still down but I mean after the company and stock market write offs this is pretty cheap.
The Bottom Line
The prices of energy shares, energy itself, energy trusts, master limited partnerships, you name it, all hit lows last seen at the 2009 Financial Panic low. Oil traded then in the $33 level and hit $34+ this past week. Sure it could fall further but some buying is now justified to scale in what are in some cases like AMLP 9% yields.
An old adage in the market is,
No one rings a bell at the bottom.
Socionomics
Pop Trends Price Culture
Understanding that this is likely to be a low in the price of oil first requires that on absolve yourself of the notion that supply and demand govern the price action of financial goods. They do not. The price action of financial goods is governed by mood. The price action of economic goods, food, department store clothing, etc. is determined by supply and demand.
Since mood determines financial good prices, it is possible to have warm 70 degree weather in NYC, we do, and a low in the price of natural gas. The write downs by companies and write downs in price of energy shares suggest low prices are finally assigned to energy and energy service shares.
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