Friday march 6 2020
The Bear Emerges
Has the Financial Bubble Popped?
There is no sign of a technical bottom in oil.
Last Week’s Column
Friday March 6, 2020 7:30 AM CST Our discussion about early warning signs from a weakening Energy Service Sector, the XES, have now come true. Consider how quickly these two stocks have cratered.
ExxonMobil traded below $50 Thursday, just four dollars above book value. Cullen Frost Bank, while making about $100 million last quarter, has dropped 24% in two months. It trades at $74 just $14 above its book value.
A bullish economy has a multiplier effect. A dollar spent passes through multiple hands to result in many dollars generated. But macroeconomics works in reverse in this situation. Conventions and trips are being cancelled world-wide. Air lines, cruise lines, and hotels are reeling. Gondolier rides in Venice are down 50%. Auto sales look to be the worst since 2009, down 80% in the last month in China.
Social mood is unremembered. And ‘buy the dip’ has been the mantra since this bull market began in the summer of 1982. As noted last week, the energy market is already deep in bear territory and is now joined by financials like Frost Bank.
Accountant Ralph Elliott formed his Elliott Wave Theory in the 1930s It is a three steps forward, two steps back progression, in both up and down markets. Once the five wave progression ends, the markets reverse. The coronavirus is a news distraction. The five waves have ended and the news is simply looking for a fundamental reason for the reversal. Yes we do have a massive world supply-chain problem. But the evidence listed here last week argues that if the bull has not ended, it is surely on life support.
XOM as I write is making bold predictions about its plans for 2024 which include a 10% cut in Permian production. Note to XOM, the markets will be dictating your capital expenditures, note your falling stock price. As usual OPEC is grappling with Russia for production cuts. Whatever they do it is not likely to change the price trajectory, oil prices are headed for the low $40s.
The affirmation of my belief that the 182bull market has ended is the Ten Year Treasury Note Yield of .92%. Jerome Powell and Donald Trump are now out of ammunition. There will be no Quantitative Easing to rescue this swoon. Once again the yield curve is inverted, long-term rates are below short-term rates. The stock market tends to run about nine months ahead of the economy, so look for the effects of all this to become evident in the fourth quarter.
The DJIA is down another 761 points in pre-market trading this Friday. This suggests the markets are accelerating in what Elliott termed a third wave, the strongest of the five. If so, this first decline won’t end until the low 20s.
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