The Market Perspective

Friday June 30, 2017

 

Watch the Market, Not the Media on Energy Prices

I don’t think we will ever see single digit mortgage rates again

Career Realtor Jeanne Arnold, Andrews, Texas, circa 1983

Jeanne was a client and good friend and a life long successful realtor. But her comment then is significant as she made it near the absolute peak in interest rates. Market prices, in any market, are the result of the collective mood of many players. Social mood swings from one direction to the other unremembered, constantly fluctuating, and a result of social interaction. Therefore correct analysis of market conditions results from observing the action of market prices, not what the media is broadcasting about the market at any point in time. So, here are a few things to keep in mind before we look at the actual market action.

1. The news is plain to see in newspapers and on the internet. It is the job of the social mood analyst, socionomist, to explain the market action versus prevalent mood.
2. The energy price is a mix of both economic (the demand for gasoline, natural gas, and diesel) and financial (speculation via leverage in stocks, futures, and options) exchanges. As a result financial speculation over time drives prices to irrational levels both high and low. Recall the June 2008 high of $145 or the February 2016 low of $25, both were simultaneously irrational, but real.
3. The non-financial media invariably trumpets a new permanent plateau, or bottom, at market highs or lows, reflecting the prevailing mood, rather than market reality.
4. Prices cannot stay so high above market reality ($145) or below the cost of production ($25).
5. At market peaks and troughs, participants invariably never remember the opposite trough or peak that resulted in today’s extreme.

Social mood is in contrast to what market action will be at a market low. Hence media istelling us supply will overwhelm demand for years to come, there is no bottom in sight.   Memories of supply shortages from the Middle East (1972, 1979, 1992) are conveniently forgotten. There is no perceived urgency to never again be dependent on the politically unstable Mid –East. While the exact timing of such an event is difficult to identify in real time, there are plenty of clues hat time is at hand.

The energy industry decried Obama’s rejection last year of Keystone Pipeline, the most shovel ready jobs project in the US. Now however, the headline reads. Glut Kills Appetite for Keystone. But the market says otherwise.

Yesterday President Trump signed two permits for Nustar Energy to add to pipeline capacity to Mexico, increasing US energy exports.   As the President put it, the golden era of American energy is underway.  Unlike those now disinterested in pipelines, Trump sees the big picture.

Finally, what are the markets actually telling us? Somehow, the markets always anticipate change before it happen.  

• Transcanada TRP, which owns Keystone, is up 50% from the Obama blockage and has regained its uptrend.
• The percent of energy stocks in bullish position   just broke above its 50 day moving average. It has fallen from 95% last December to 15 and now 20% this June. Additional indicators suggest a bottom is at hand.
• Since the Wall Street Journal announced oil was in a bear market just last week, prices have moved up every day since. Price reversed just above last November’s low at $42. Oil price is up $.42 as I write this morning.
• Bell weather Transocean RIG is making money (17.59% profit margin), has a current ratio of 2 to 1, but is trading for a mere 20% of book value. This is the kind of irrational valuation that occurs at market extremes.
• This past week John Fredriksen, CEO of Frontline Ltd. Announced he will be buying competitor companies to purchase VLCC very large crude carrier ships below actual cost. FRO is trading for 62% of book value (4^th largest inventory of VLCCs in the world) and pays a 10% dividend while making money and generating operating cash flow. Again, this is an irrational low valuation.

While the headlines are negative, prices on oil, RIG, FRO, BPENER are all suggesting a bottom is either at hand or near by.   Check out more of our analysis at http://www.themarketperspective.com.

No one rings a bell at the bottom!

Dennis Elam is a veteran of the Permian Basin oil fields and has written on the topic for some 20 years. Contact him at [email protected].

Global Rates Increase, Dollar Falls, Commodities Inching Up

Thursday June 29, 2017

This post headline was our theme this past weekend. We expected stocks to top, bond prices to bottom, and commodity prices to bottom and begin increasing.  Here is the headline story from today's WSJ.

Global government bond prices slumped for a third straight day Thursday, while the dollar fell against several developed-market currencies, as investors continued to digest messages from central banks signaling the end of easy-money policies.

Investors dumped U.S. Treasurys and European bonds Thursday morning, sending yields on many securities to their highest levels in more than a month. Meanwhile, the euro, British pound and Canadian dollar logged further gains against the U.S. dollar after rising sharply earlier this week.

The moves follow a raft of comments from some of the world’s largest central banks pointing to a reduction of the extraordinary stimulus measures that have underpinned global markets in the years after the financial crisis.

The big surprise may be just how fast this happens.

Energy prices have been up near every day since the WSJ announced last week that the energy market had entered  a bear market.

 

Energy Slowly Turning Up?

Wed June 28, 2017

From Contango to Backwardation

I have been suggesting that energy might be, despite what the headlines suggest, slowly turning up.

Our last post looked at the prediction of a Norwegian billionaire who is buying more VLCC Very Large Crude Cargo ships with that expectation.

Here are some  early warning indicators.

Bullish Percent Energy Stocks

BPENER has pulled over its 50day MA, the first time since November a year ago, and the first time since it fell below in January.

MACD is rising, the histogram has turned positive, and the relative strength at top is over 50.

USO

USO is breaking over its 50 bar MA on the  two hour or 240 bar chart.  MACD is up and PMO is approaching the zero line.

RIG Transocean

RIG is in the same situation.  It is always hard to call a bottom early. But the stats on RIG here are interesting.

It is trading for 21% of book value which is 8.37 / 40.67

Current ratio is 1.99 which is current assets to current liabilities

$3 billion in cash in the bank.

Share price is up 3.72% today.

RIG actually had $778 Million in net income for FY 2016

RIG had net cash flow overall of $713 M in 2016 with a whopping $1.911 billion from operations

NO it is not paying a dividend

Cash per share is $7.91 cents

The hall mark of the end of a bear market occurs when investors sell perfectly good companies making money because the stock price is still falling.

Is that the case for RIG?

AMLP had a nice rally on the 240 bar chart today as well

 A falling dollar tends to be suportive to commodity prices, and oil priced in dollars.

UUP

UUP is the ETF for the US Dollar, still falling, treasury  yields and foreign markets are up, as is the oil price

 

 

Shipping Owner Frontline Buying More VLCCs

Wed June 28, 2017

John Fredricksen, owner of Frontline LTD FRO the number 4 Very Large Crude Container line, is buying more ships.  See the

article in today's WSJ. This is a bet that oil prices are or are near a bottom so that shipping will improve. 

The billionaire is looking to spend more than two billion dollars in acquisitions. He is looking to buy companies rather than buying tankers from rivals.

Given the depressed state of the shipping industry this sounds smart.

Frontline FRO - Weekly

The main panel is FRO, Frontline. I used the price of Brent as more representative of the cargo of FRO.  As one can observe there is a high positive correlation.  In fact, FRO then fell and peaked well before the last decline in oil.  And now both go begging for buyers.

I made the case in the Monday post that  oil prices have a symmetry, up from  1999 to 2008, then down for the same nine  year span into 2017.

FRO has done the same as one can observe on the twenty year chart below.

 

FRO Monthly 20 Years

 

The same symmetry exists for FRO.  I do not expect oil to return to $140 any time soon, if ever. But who knows, a war in the Middle East would go a long way towards boosting price. Russia is already claiming the skies over Syria telling the US where it can and cannot fly, see the interview with John Bolton in the last weekend WSJ Editorial Report on Fox TV.

So I logged into Finance.yahoo to obtain the vitals for FRO.

Frontline

 

Imagine my shock and awe to discover it pays a 10.87% dividend. Can this continue?

Looks like it can, the link to the Cash Flow Statement is here.

https://finance.yahoo.com/quote/FRO/cash-flow?p=FRO

FRO has generated substantial cash from operations in each of the last three years!

Overall cash flow is negative but that is because, as the article says, FRO spent $578 M on investments in 2016.

 

 

 

Oil Has Been In A Bear Market for Years, not Months

Monday June 26, 2017

The headline in the WSJ last week was

 

Oil Enters Bear Market, Down 20%

John Murphy has issued several reports suggesting the FED has it all wrong, nothing new in that of course, and that deflation not inflation is the problem

I would suggest that commodity markets have been in a nine year correction coming off the 2008 top with $145 oil.  there is nothing new about this at all.

WTIC

Observe that we have equality of time at work here. From the low in 1999, the high occurred in 2008, nine years later.

From the high in 2008, we are now nine years out in 2017 coming up on a symmetrical low to equal that in time from 1999.

Also note this is also roughly a 17year cycle.

At top RSI has registered lower high s on each assault since the 2008 high

Finally MACD looks about topped out as does RSI.  As stated, all of this seems to have just now dawned on the vast majority of observers. The headline in the WSJ last week. Oil Now in  Bear Market is about nine years late.

The low actually occurred in December 1998 at $11. Will the market take until December 2017 to bottom this year?

As shown this weekend, on the two year weekly WTIC chart, MACD and RSI is still falling. We are nowhere near enough to call a low yet.

Today June 26 is likely to be a high in the stair step progression of the final leg of this bear market.

USO

The two hour chart shows a classic bear progression of lower highs and lower lows to the downside.

Today price is reaching to the upper level of  the parallel downtrend line.

The Bottom Line

Our view is that the bear market in oil began in July 2008. A Wave A took it down to $35 ins six months. Wave B then rebounded to $110. A long sideways correction then ensued lulling the world into complacency. The world began thinking triple digit oil prices are the new normal, they are not. We now expect final lows  to follow the nine year symmetry

nine years up  1999-2008

nine years down 2008-2017

 DUG Energy Bear Fund

 

 

 

 

 

Stocks Still Rising, Oil and CRB Falling, Mood Shatters

Weekend June 24 2017

Social Mood

Illinois is Gone

A writer at the Chicago Tribune suggests Apportion Ilinois to neighboring States

Negative social mood towards oil not over supply is sinking the oil price

 One of the categories I created when this blog began in 2009 was The New Civil War.

\Click here to view the original three maps outlining the previous and now present Civil War States.

 

The New Civil War pitted states against other states just as the 1861-65 conflict did. Except this time it would not involve physical warfare but warfare wages

along business commerce line, as some states attract and other states lose business

a hunt for new business locations

a demographic shift as NY and CA and CT and IL continue to lose citizens

A right to work fight as more states enact such laws to attract business

Now Texas Responds to the CA Atty General ban on state travel to Texas

CA is trying to impose its political ideas on other states given the size of its budget and population. In this way CA is now competing with the Federal Government.   In the same link Single Payer Healthcare is sidelined for now in CA, as it did not get done at the Federal level.

Between the states social mood is not just negative, it is shattered.Consider Johnny Depp venturing into Kathy Griffin territory.

Markets

WTIC

The move from Feb 2016 at $25 to January 2017 at $55 was Wavwe A.  We are now in a Wave B. Fib re tracements come in at 40 and 37, pretty close to the two blue arrows where teh market corrected and then moved up again in Wave A.  MACD is still falling in the lower panel so a move to 36-38 looks reasonable before we can expect MACD to bottom.

DUG  A bet on lower oil prices

On the other hand, the chart of DUG, a bearish bet on energy companies, is just really getting  underway. I took a position in DUG this past week and expect top add this next week. IN the top panel DUG is just now passing the zero line, this is what we mean by saying it is just getting underway.

Apache APA - Our Bellweather

If 45 goes, the next stop is 35, APA closed the week at 46.

CRB index

The CRB index is still falling.  Not much support between here and the bottom.

I am guessing the various stock markets finally peak as these commodity markets bottom. probably by this fall.  All will not simultaneously peak and bottom at the same time. It will be a process.

The stock market is still climbing, no sign of a top here. Transports are higher and the Russell 200 hit a new high three weeks ago.

Interest Rates

Rates on the five year note doubled in Wave 1 form1 to 2.1%. Wave 2 is correcting that rise, nearly filling the gap set last December on the chart.  Certainly a test of the MAs before the uptrend resumes is not out of the question.  And as with commodities, rates will probably begin really advancing again when stocks begin a topping process.

 XLF

Rising rates are good for banks. Here the XLF is falling with the correction in interest rates. XLF should be bought as rates bottom in their correction.

Health Care ETFs

XLV  John Murphy keeps raving about how XLV keeps advancing, but it looks late in the day to me to be buying now.

The Bottom Line

The last couple of days watching the tape it appears the summer doldrums have hit the stock market. Let's look for an assault on  final highs in August for stocks as commodities and rates pull back to their eventual lows. Buying commodity stockcks this fall should pay off as well as it did in February 2016.

 

 

[email protected]

The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance and no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks. Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned. Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital. No guarantee can be made to the accuracy of text or charts.

 

 

 

 

 

No Bottom for Oil Prices Yet

Post Market Close Thursday June 22, 2017

This is pretty straightforward. At top MACD is still falling, no bottom there yet.

Today was an inside day following the big down day Wednesday. I am not sure that means much.

At bottom the big volume always occurs on DOWN days. So no sign of accumulation yet.

Next stop for price support, $39. But I am not expecting much there either.

Apache

Bell weather energy stock APA fell again today, that is three days in a row down hard. Again volume higher on down days.

And MACD is just rolling over again.

Oil Production Up in USA

Thursday June 22 2017

Crude Oil Collapses

Wed June 21, 2017

WTIC

It is possible oil could reverse here as it did last November, but I am not expecting that to happen.

Notice the big volume today and MACD still falling at top

Weekly WTIC

Once the 40 level is taken out, there really is nothing until we go all the way back to the February 2016 lows.

Apache

After three days Apache is down 7.83%, this is my reliable bell weather for energy stocks.

With final lows not due until this fall, this market could return to the February 2016 lows.

I bought DUG today, it is an inverse play on energy stocks. More every day as this has heated up.

 

 

Important Test for Oil This Week

Weekend June 18 2017

Stocks are still strong but vulnerable to a pullback. That is all we would expect here and then a resumption of the rally.

TLT Bonds

Bond prices fell amid anticipation of FED rate hikes. But now bond prices are moving above the year long downtrend line. This also suggests lower commodity price, look out oil!

The Dollar is still falling,.

Crude oil will need to find some support in this 43-44 area or we are headed much lower.

 

We noted that social mood fractured this week.The shooting at the  Republican practice game resulted in a let's come together call, for individuals like Chuck Schumer who has been most cynical about all things Republican.

Don't expect the call for civility to last.

Social Mood Fractures

Trump is a complex, if dangerously mad, man.

The authors propose that his mental illness is affecting the nation’s mental health as well.

From the forthcoming book, The Dangerous Case of Donald Trump

Kathy Griffin’s display of Trump’s dismembered head last week prompted First Lady Melania Trump to literally wonder about Ms. Griffin’s mental health.

Friday, June 16, 2017, 7:00 AM CST

So there you have it. Each political camp has reason to believe or has concluded that the other is mentally ill.  

Here is why this is important, way beyond mere name-calling or conclusions and insinuations about mental stability. Social mood generates social actions. Happy people are optimistic about the future and express this by attending happy themed entertainment such as La La Land. Unhappy people tend to seek out entertainment that mirrors their mood.   The Exorcist, billed as the most horrific movie ever made, was wildling successful during the bear market of 1973-74.

On my weblog, The Market Perspective, I have warned of disintegrating social mood for some time. The excerpt from Kathleen Parker’s column today in the column lead is a good example. Scanning newspapers today reveals a host of negatively themed mood events.

Here in San Antonio the current Mayor and six of ten city councilmen were given the boot, and voted out of office.

Representative Steve Scalise and three others were shot during a baseball practice.

In response Paul Ryan and Nancy Pelosi condemned the event and promptly adjourned for the day. This very lack of action is, of course, precisely what propelled Trump into office, did Congress not notice that?

Arrest warrants for twelve of Turkey’s President Erdogan’s thugs who attacked protestors in Washington, DC have been issued. The negative mood was that Erdogan thought he could get away with it, and in fact did.

With elections scheduled next year in both Mexico and the US, time is running out for re-negotiating NAFTA.   The failure to do so casts a negative pall over negotiations that would begin in 2019.

After six years of promises, the Republicans have not passed a single large legislative act.   Health care, tax reform, trade, military are all still awaiting action.

Charles Calomiris at the Columbia Business School notes that “Dodd-Frank has been a trifecta of failure. It has not achieved its objectives but has imposed enormous costs on banks and the economy.” Again Congressional progress on reform is not in sight.

Two hundred Democrats have sued President alleging his business dealings are a conflict with his Presidency. This is the route of legal harassment that eventually drove Sarah Palin from the Alaska Governor’s Office.

Kroger shares fell 19% yesterday on slower sales. Nine percent of Macy’s customers account for 46% of sales. Both statistics reflect the big shift in retailing and closing of hundreds of stores vacating shopping centers.

The New York Public Theater is staging a play based on the assassination of Julius Caesar but with Trump in the part of the Emperor. In contrast to most stage acts, the death is vividly portrayed in bloody fashion. Do not expect a cancellation of the ‘performance’ in the wake of the political shooting this past week.

And yes tech stocks that have driven the rally this year have begun selling off.

Social mood is not a crystal ball but this same sort of negativity gravitated to markets in 1973, 2000, and 2008. It bears watching.

Oil prices bottomed in February 2016 around $25. Prices then rose moving back and forth across a support line at $45. I count at least five successful tests of that level since May 2016.That level is being tested once again. Crude WTIC closed at $44.45 yesterday. Energy share prices have sagged across the board. The first sign of a turn will be when the shares of the strongest players begin climbing, amid low oil prices. This would be Chevron-Texaco, Conoco-Phillips, BP, and ExxonMobil.  BP may have reversed its down-trend. The others are at least moving sideways and have popped to the upside the last few days.

The percent of energy stocks in bullish formation has fallen to 15-17%. This is the same level of the first pullback off the February 2016 bottom occurring March 2016. The next few trading days and weeks will reveal whether the $45 level has held or if we have more downside before a bottom is recorded.