Weekend Oct 29 2016
My column this week, as well as the professorelam.typepad.com blog highlighted the impasse at Exxon Mobil. Basically XOM is not generating enough operating cash to fund both its investing and financing functions.In fact XOM has had to borrow to pay the dividend. XOM is the subject of two articles, one front page, in the Weekeend WSJ.
http://professorelam.typepad.com/my_weblog/2016/10/somethings-gotta-give-at-xom.html
Believers in fundamentals dislike the notion of cycles disrupting the normal course of events. But cycles are a normal event, and we may well be on the cusp of several cycle tops at the same time.
Sixty years ago, the stock market topped on August 2, 1956. The markets have made a similar top some sixty years later on August 15.
This market is probably the second strongest bull since the 1929 bull market. And it is about eight years old going back to 2007-08. Prior to that we had market tops in 2000 and 1992. Five years prior to that the markets topped and corrected in October, 1987. And October eerily looms as a market known for reversals though time is about up for October this month.
With such a long and strong market the bulls are not giving up easily.
But signs of change abound. Interest rates are moving up. Since July the five-year note has risen from .9 to 1.325%. Other maturities exhibit similar increases. Bank and insurance stocks are rising on the prospects of higher rates.
The Commodity Research Bureau index has jumped from 155 to 190 since February. Crude oil has doubled from the mid 20s to a triple top at 50. Yes it is pulling back a bit but that is all I expect here. Gold has pulled back to its 200 day moving average at 1269. And it has been one of the best performers of the year. In similar fashion, silver is down from $21 to its 200 day MA now trading at 17.64.
After a big move from $2.00 to $3.40, natural gas has corrected back to near $2.60.
So we have rising interest rates and rising commodity prices. It then follows that stocks peaked on August 15 and have slowly pulled back. Son far the Dow Industrials have refused to break 18,000 but the market is incredibly quiet in a narrow trading range, as we go into the election.
Energy stock prices for both Permian Basin and Eagle Ford Producers have risen in strong fashion. This is another confirming puzzle piece that commodity prices have seen their lows.
Now here is something most investors have probably not noticed.
Exxon-Mobil is not producing more cash than it is spending. One can examine the cash flow statement to see the evidence of this. For the quarter ended June 30, 2016, XOM did produce $4.5 B from operations. But XOM spent $3.1 B on investments and another $1.775 B on financing. The current quarterly dividend requires cash of some $3,176,000,000. I wrote out the entire number for emphasis. And for the last three quarters XOM has had to borrow heavily to help make that dividend payment. XOM has borrowed about $10 B over the last three quarters to help make the dividend payments of about that same number.
Something has to give here. Yes, Exxon Mobil is one of the largest companies in the world with huge mineral reserves. But eventually cash from operations has to catch up with cash required for investing and financing.
Our bottom line is that we are very cautious on the stock market here. Tech and banking are holding it up while broader measures of stocks in bullish mode have fallen hard since the August highs. Rising rates are rarely good for stocks, coupled with rising commodity prices a shift appears on the horizon. Finally Real estate investment trusts and Utilities are also down which is a further signal of higher rates ahead.
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