Friday March 20 2020
8 30 AM CST
Don’t Get Complacent Quite Yet
Friday, march 20, 2020 , 5 37 AM CST
What I am trying to do is prevent the oil and gas sector from disappearing over the next 18 months
CEO Scott Sheffield, Pioneer Natural Resources
Here is an easy to understand Elliott Wave Analysis of the stock market decline since the top February 12 at
DJIA 29, 586.
Wave One Down 29, 586 – 25,000 Gee this is a surprise, what’s wrong?
Wave Two Up – 25,000 – 27,000 Okay, things are not nearly as bad as the media is making them out to be
Wave Three Down 27,0000 – 19,000 Something is seriously wrong, energy shares are in shambles
Wave Four under way – After a record oil price decline, a record percentage increase occurs, okay the big guys have this under control
Wave Five, yet to begin – Prices fall to the 16,000-18,000 level wiping out half of the February 12 market capitalization
I strongly believe this is a short-term guide to what is most liable to happen . While the Industrials have declined about 35%, the Transports are down 45%, suggesting lower prices ahead.
The energy share price declines are in the panic zone, Nustar NS has lost 80% of its February high. If it could maintain its dividend it would be a 35% yield. That is not liable to happen.
To this point we have been told the international majors, like Exxon Mobil, have strong enough balance sheets to weather this storm. But that was a couple of weeks ago. XOM has lost 50% of its market value in 2.5 months. The dividend, if it survives is a whopping 10%. Is that a buy, or an alarm signal for the entire industry?
The problem for energy is two-fold. First the Saudis and Russia have engaged in a price war, calculated to wipe out the US Shale Producers, see the opening quotation. This is having that effect. Second, with everyone staying at home, and shipping and airline traffic all cancelled, there is lackluster demand for all things energy. That is why Valero VLO has lost 2/3 of tis value since the February high..
The energy industry is asking for diplomatic help including sanctions against Russia. Asking the Saudis to cut production would only play into Russia’s hands, which is undesirable from the Mid-East Standpoint. And threatening Russia is problematic, as US Soviet relations are reverting to Cold War Status.
Elsewhere the rush is on for dollars. Ford cut its dividend, and Boeing has lot 2/3 of its value.
The balance sheets of companies are only an illusion. The illusion persists as long as investors believe asset values. But should faith in the assets fall, the liabilities still stand.
And that is why Wall Street is is scrambling for cash.
Isolation is probably the best preventive for virus spread. But even the US economy will not be able to withstand more than two to three weeks of shutdown. Already unemployment claims are rising. Most households do not have even $500 in cash. Should this shutdown be prolonged, the economic consequences will be severe. In short, this stock market ‘correction’ would not be temporary. Increasingly this looks like the start of a sustained bear market.
In a final note, it appears the long romance with Higher Education may have ended. Universities are cancelling classes (pardon, going on-line) but not necessarily re-funding tuition or room and board. The first signs of student discord are evident, questioning school expenditures. This is yet another potential ‘default’ in the making.
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