Professor Elam

More Evidence of Market Top

Friday Jan 21 2022

We have simultaneous bubbles across all major asset classes. He estimates wealth losses could total $35 Trillion should valuations return to two-thirds of the way to historical norms.

 

Jeremy Grantham co-founder of GMO investments

What does Mr. Grantham mean by two thirds of the way to norms? One of Bob Farrell’s ten market rules is that all averages eventually revert to the mean or average. The last time the Dow Industrials touched their 200 month moving average MA was during the sub-prime melt down in 2009. That level was below 10,000.   From its present level of 34,715 a two-thirds loss would put it at 11,455. The current 200 month MA is 17,469 about half the DJIA level now.

But the eye-popping returns have bee in the NASD. In the 2000-2002 melt down it fell from 5,000 to about 1,500, a loss of 70% or about Grantham’s 2/3. Today the NASD trades at 14,1544. Its 200 month MA is at 5,020. A tenet of social mood is that past events are unremembered and that fits the scenario now. In 2009 the NASD fell below 2,000. The NASD is already down 10% just this month from its high. Only 15% of the NASD stocks now trade over their 50 day MA . Now that the selling has started in the FANG stocks, this the bottom is literally dropping out.   The NYFANG index has dropped from 8,000 in November to 6,836 yesterday.

For those that scoff at such bear markets consider what happened just yesterday after the market closed.   Covid darling Peloton dropped 24% after announcing it was pausing production of its bikes.. Netflix fell 19% after reporting 8.3 million new subscribers. In a bear market, all news is bearish.

We have repeatedly warned in this space that the internals, breadth or overall participation, was much weaker than the new highs would indicate. All indexes have made their final highs between early November and this January.

The good news for the Permian Basin is that energy prices seem to want to vault over the recent highs of $84. We need a weekly close over $84..50. Crude trades today Friday at $84.91 so that could happen today.

The correction in natural gas was larger than I expected.  It dropped fro $4.75 to $3.65. Today prices have edged up to $3.90.   It needs a daily close over $3.95 to get going again, t hat could happen.

The wild card is whether Putin will stage as Team Biden put is this week, a minor incursion to the Ukraine. As the Ukraine President noted in response, there is nothing minor in the deaths of his citizens.

Such action would surely boost the price of oil and gas theorizing that Russia would cut back on EU natural gas to throttle any attempts at armed opposition.

Deflation

Weekend Nov 27 2021

Farrell Rule #9

9. When all the experts and forecasts agree – something else is going to happen.

Translation: This rule fits with Farrell's contrarian streak. When all analysts have a buy rating on a stock, there is only one way left to go (downgrade). Excessive bullish sentiment from newsletter writers and analysts should be viewed as a warning sign. Investors should consider buying when stocks are unloved and the news is all bad. Conversely, investors should consider selling when stocks are the talk of the town and the news is all good. Such a contrarian investment strategy usually rewards patient investors.

I originally wrote this column Tuesday focusing on inflation. Friday, today, was a shortened trading day closing at noon CST. This is the typical Friday after Thanksgiving and usually consists of low volume and little movement. That was not the case today.

The Goldman Sachs Commodity Index declined 6.65%, today.

Crude Oil declined $10.24 or 13.06%, today. This reminds me of 2008 when crude soared to $140 and then collapsed to $35 by Christmas.

The Dow declined 905.04 points or 2.53%. Small caps lead so the Russell 2000 dropped 3.67%. the DJIA and S & P made new highs in November but have dramatically reversed.

while the media blames this on increased Covid, the truth is that the markets have completed a five wave pattern dating back to the lows of 1931. It is highly unusual for such a reversal to occur on what should have been a minor day but here it is.

See https://professorelam.typepad.com/markets/ ofr charts and more commentary this weekend. My opinion is that this is NOT a buy the dip opportunity. We have detailed the warning signs for months via lack of breadth, focus on electric car and a handful of FANG stocks, wild optimism for meme stocks which are not earning any money, and the crazy crypto fad. Add in the mania for art and real estate and we have a market mania top at hand.

Fooled by Randomness

Friday Sept 18 2020

Fooled by Randomness

Nassim Nicholas Taleb advocates a ‘black swan robust society’. This means a society that can withstand difficult to predict events.   His metaphor of a Black Swan is an unexpected or difficult to imagine event. For centuries it was believed all swans were white, until a black swan was discovered in Australia.

The Covid Pandemic has been a Black Swan Event. Yet in retrospect, perhaps society was clinging to rear view mirror ideas of how to get things done. Did we really need airplanes crammed with passengers leaving major airports every ninety   seconds? Apparently we did not.

Entire industries are facing a top to bottom re-make or possibly the oss of large segments.

Exxon and Chevron are partnering with the Rocky Mountain Institute to track methane emissions in the Permian Basin. The industry has come under criticism for flaring excess natural gas.   Most major international energy firms like BP are already looking away from carbon fuels to wind and solar. In ten years Exxon has gone from the most valuable company on earth to being ejected from the Dow Industrials.   Hello Black Swan. Event.

Natural gas inventories swelled to 3.6 trillion cubic feet last week above analyst expectations (another unexpected event). As a result natural gas futures collapsed 9.9 percent in one day to $2.042.

Emerging markets have been the source of carbon fuel demand. But last quarter India’s GDP dropped 39 from a year earlier. No wonder demand is faltering.

Energy service continues to contract losing over 100,000 jobs. Only 326% of S & P energy firms are now in bullish posture.

The FED has spent billions buying bonds to shore up the stock market. That money has found its way into tech and pharmaceutical shares.   The NASD registered a new high. But the percent of NASD stocks in bullish position is only 55%, and falling Again this speaks to narrowing breadth of leadership with IPOs like Snowflake skewing the results.

The fate of entire industries remains unknown. Six months into the pandemic, America’s offices sit half empty.   Airline traffic is only 30% of what it was a year ago. Airline execs were in Washington this week asking for $25 billion to keep workers employed. As noted that is a small numer compared to a $1.5 Trillion rescue. But with Zoom and Webex dominating the new conversation, airlines look a lot like the horse and buggy industry circa 1905.

Hotels are doing no better with airline travel reduced. Governor Abbott is allowing more restaurants and bars to have larger patronage. But expectations are still that many such firms will not survive.

The big winner is Amazon now planning hundreds of new distribution centers. Brick and mortar retail continues to shrink.

A Round Up Up of our Recent Newspaper Columns

Posted Monday March 9, 2020

I write a weekly newspaper column on energy and the market prices for the Odessa American and the Andrews County News. Each city has a prominent place in  oil production in the Permian Basin of West Texas. 

My ACCT 5308 Ethics class is in a contest with the  University of Delaware and  William and Mary for the best socionomics paper.

I am re printing several recent columns in tis space for convenience. The calls about the stock market and energy rices have been quite acccurates. When social mood is strong as it is now, Elliott Wave Anaysis works well.

 

March 6 2020

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.

 

February 28 2020

Has the Financial Bubble Finally Popped?

.Look for a needed pullback in stock prices and lower oil prices over the next month.

Last line of this column Feb 23

This column and the website, themarketperspective.com, have cataloged numerous examples of ‘top market’ social mood thinking over the last several weeks. We noted that Schwab’s $26 B stock deal for TD Ameritrade, now that many commissions are zero, was typical of how social mood from the last market bottom is ‘unremembered.’ Even more remarkable was J P Morgan’s purchase of E Trade at $13 billion, declaring the wealth manager was ‘ready to take on Fidelity. ‘

Amid a 14% market decline over four days, I just saw my first ever Aston Martin television ad, lease your Vantage for just $1,699 a month (but zero down!). Again this is expansive top of the market evidence.

As always, brokerage firms are recommending all stand pat noting how many times the markets have recovered in months after a big decline. I would remind readers that months before the October 1929 crash, the smart money sold out and left America for extended vacations.

Indeed the same thing has been happening now. The Transports peaked in September 2018.   The small cap S & P 600 did so a month before that. Neither has returned to those highs. This is termed distribution as the early buyers sell to those late arrivals

As a matter of full disclosure, while working for Ross Perot as a broker I was on the front lines of the 1973-74 50% DJIA decline. We heard all the same assurances then as now, amid pretty much the same negative social mood. Then scorn was heaped on Nixon, now on Trump.

Here are some reasons to wonder if this is a repeat of 1973-74, 2000-2002, 2008-2009 bear markets, rather than a short term pullback like December 2018.  Yes there will be a low and a bounce but will that be repeated over the net two or three years?

Political social mood is irreconcilable. No matter which side wins in November, the other will be even more furious.

There has never been a stock market rise that lasted more than ten years. The two most important indexes peaked over a year ago.

Breadth has been declining with ownership focused on the FANG stocks.

Outlier Tesla recently traded at a price-earnings ratio of 183 to 1 while the S & P as at 20.

Yes brokerages were absorbed in the 1974 sell -of but for nothing. Professionals who should know better paid billions (the sellers were willing to take stock not cash) for companies now already at a discount to that purchase price.

The energy sector is already in a bear market.

Trump has his wish, the FED lowered rates to near nothing. If this is the start of a major bear market, the FED has nothing left to offer in terms of stimulus.

As noted on tehmarketperspective.om,, the next target for oil is the December 2018 low of $42.50. But with prices dropping over a dollar a day, now $45.72, even lower prices seem likely. There is no sign of a technical bottom in oil as of this writing.

February  21 2020

Markets Marking Time For Now

It shows he’s (Buffett) certainly willing to swing at a fat pitch when it comes across the plate

Thomas Russo, holder of Berkshire shares

Well Thomas, I would say it shows that even Warren Buffett has succumbed to expansive social mood at what is surely a broadening top of the stock market.

Buffett spent $36 billion upping its Apple stake according to its 2018 report. My point is that there are lots of contrarian plays going on, the exact opposite of how the same players began in the bull market of the 1980s.

Back then, Buffett turned Bill Gates down on an offer to buy Microsoft shares. Warren said he didn’t ‘understand’ the company. Granted, Apple is a computer/phone maker while MSFT is a software firm. But back then, Warren was buying Coke and later Dairy Queen, as well as his favored re-insurance shares. All are, well, easy to understand. Berkshire shares have underperformed the S & P 500 while Apple has tripled the S& P 2019 returns. It looks like Warren is playing catch-up.

Expansive social mood results in new market highs, and an urge to for an ‘inclusive let’s get together feeling.   BRK buys Apple, Schwab spends $%26 billion oi TD Ameritrade and now, Morgan Stanley sped $13 B to buy E Trade.

This is the biggest deal, granted in stock, since the 2008 financial crisis. Of course it is as DJIA 29,000 is the biggest market plateau since then as well.   Morgan Stanley CEO Gorman declares he is ready to take on Schwab and Fidelity. So Wall Street Wealth Manager Morgan wants to be Wal-Mart to eight million E Traders. A the market bottom of 1974, Merrill acquired White Weld and Shearson did the same with Loeb Rhoads, both on the cheap. At this market top, firms are paying big bucks for competitors, the exact opposite of when the DJIA was 577!

Meanwhile Victoria Secret has been sold at a one billion valuation, a fraction of what Lululemon went for with half the sales. The news article states Victoria Secret has ‘lost its way.’ We would argue the opposite, social mood towards racy lingerie has changed as the stock market has matured. In the1980s Victoria Secret was all the rage with gaga models gracing runway stages.   Of course, expansive mood brings on that ‘Let’s Misbehave’ social attitude.   Bear market attitudes are not so frisky. Are we seeing the first shot across the bull bow, remember there is always a mix of moods as markets slowly reverse.

Crude oil prices have managed a weak rebound after falling over ten dollars. This is in spite of a strong dollar. That strong dollar has weakened emerging markets and resulted in more narrow breadth in US Markets. Look for a needed pullback in stock prices and lower oil prices over the next month.

February  14 2020

Oil Price Bonces, Shares Not So Much

Global oil demand is expected to have the first quarterly drop inmore tam a decade amid a likely slowdown in China due to the Coronavirus.

February  7 2020

Dollar Surge Threatens Even Modest Energy Recovery

Friday Feb 7, 2020 6 52 AM CST

Liquefied natural gas is at the lowest price on record in Asia at $3 per million British thermal units BTUs. That is down from $20 six years ago.

WSJ Friday Morning 2/7/20

Legendary Investor Jim Rogers observed that commodity markets have to fall below the cost of production to finally make a bottom. This wipes out the bull market excesses off those who borrowed too much money. Their debt load forces them out of the game, bankruptcy or merger, as the ‘strong hands’ take over. This column has warned that low LNG prices might/would threaten the billion dollar LNG export terminals being constructed in Corpus Christi and elsewhere along the Gulf Coast. Sure enough, Cheniere symbol LNG (how is that for irony?) dropped 3.4% Thursday to a new recent low of $57.65.   Debt ridden Chesapeake CHK is trading at 54 cents.

The entire energy complex (crude ,heat, gasoline, natgas) registered lows this past Tuesday. Taking those lows out will suggest any hope of a mild temporary recovery has been erased, which we suggested last week. The low Tuesday for natural gas was $1.80. Over production and lack of transport to markets has overwhelmed demand and price continues to fall.

As we have so often observed, to make matters worse, the US Dollar has surged to a new high. Asian contagion flu has investors running away from all things China and embracing the US Dollar, up 1.2% Thursday. The last high was 99 on the dollar index. I expect that be taken out this next week. Commodities like gold, silver, and energy are priced in US Dollars. A stronger dollar means commodity prices fall and still maintain their relative values.

Even if crude manages a short-term rally from its oversold condition here at $50.95, the wave patterns suggest lower prices over the next month. As posted last week, if the $50 level falls, $40 looks likely.

Narrowing breadth is a feature of a topping stock market. Just five stocks, MSFT, AAPL, FB, GOOGL, and AMZN account for 18% of the S & P 500. And it is their continued rise and weighting that is powering the averages to new highs. This reminds one of the top in 2000 when dot.coms, GE, and MSFT dominated. Speaking of which, TESLA is now worth well more than the BIG three automakers in the US. $55 billion of TESLA was traded on Tuesday more than the next ten most traded stocks including several of the FANGS.

TESLA is now valued at 183 times its $4.10 earnings. This looks awfully frothy to me, especially as social mood deteriorates further at the end of the State of the Union Message.

 

Oil Demand Set to Record Rare Quarterly Drop WSJ Today

News articles are chock a block with extreme verbs and adjectives concerning the current oil supply demand imbalance.

The International Energy Agency slashed daily demand by 365,00 barrel s a day.

The reality check is that world production is about 80,622,000 barrels a day. So this is only a .45% decline.  

Yet the IEA boldly declares, “there is already a major slowdown in oil consumption. “

I don’t think a half a percent daily is a major decline though I grant that over a month that is more significant. But if the demand is dropping in less than single digits per day, why has the price of oil dropped in double digits the past couple of months?

The answer is that oil is both an economic and a financial commodity. As fears of less consumption rose, producers and speculators sold oil futures driving the price down. So the price of oil must be still falling as we hear of more and more cases of the virus, right? Well, uh no.

The price of Brent rose to $56.34 yesterday and the price of West Texas Intermediate is up 1.4 % this Friday morning to $52.14.   Yes the price is 18% below its month earlier peak.

The job of markets is to anticipate change. The oil market over anticipated this change by dropping 18%. But markets tend to follow the pattern established by Ralph Elliott in his Elliott Wave Theory formed in the 1930s. Many of those short, betting on lower prices, bought back contracts causing the price to rise. Last week we suggested the over sold condition should lead to a bounce.

The price of energy shares is lagging the bounce in crude oil, but this is typical bottoming action..   Exxon Mobil dipped briefly below $60 and is now $60.93. The Energy ETF XLE has bounced form $52.50 to $54.87.

Last week we noted the demand for LNG in the Far East had hit natural gas prices . Natural gas has fallen from $2.90 last fall to just under $1.80.It is trying to bottom now trading at $1.83.

The pattern in falling prices will probably not be complete until April. Let’s not rule out a final swoon below $50.

The irony of this price drop is that it could inflate depressed prices. As Chinese manufacturing slows or stops, there will be a scarcity of parts for manufactured goods. That is likely to force prices of goods up.   The more China contracts, the more prices for scarce goods might rise, he very definition of inflation. So brace yourself for volatility – in the price of everything.

January  31 2020

The Jury is Out

Crude oil closed at its lowest level since August, copper prices have fallen 12% since January 14, and the Chinese Virus Roils Emerging Markets.

Wall Street Journal Today

Our headline refers to the stock and commodity markets rather than the endless impeachment hearing.

Crude oil fell apart on January 8 dropping from $65.65 to $59.61. Yesterday’s close at $52.14 was another 2.2% drop. The problem is two-fold. The fears that the China Virus Coronavirus will spread has lead to reduced expectation of fuel consumption on every manner of human transport. Airlines, rails, trucking and autos have all been hit, not to mention casinos in Macau. West Texas Intermediate now sits right at former support around $51. Will this triple bottom hold?

The rest of the energy complex has fallen as well with unleaded gasoline trading at $1.50, down from $1.80. The most troubling event in the complex is the waterfall decline of natural gas. It has fallen from $2.90 in early November to $1.83 yesterday. That price set a new low for the move. The last big low was in 2016 at $1.61.   That is the level to watch at this point.

This sort of analysis reveals the truth that low energy prices reflect a lack of confidence in the economy rather than a great bargain for consumers.

Copper prices have fallen 12% since January 14. Copper is an important economic indicator with China as the big buyer the last few years. Copper prices just had the worst eleven-day stretch since 2011. China will not be buying as much as it quarantines its giant cities.

The DJIA has fallen below 28,800 this Friday morning to 28,652. A weekly close under 28,800 turns the daily trend down.

Emerging markets have also been hit hard. The US Dollar has rebounded making foreign stocks more expensive. And the lower copper prices are also forecasting less growth in those markets

Industry giant Exxon Mobil dropped to $64.79. This is barely above the late 2018 low at $62. The ETF for FRAK, the Shale producers, has fallen from $11.60 to $9.77 threatening to take out previous lows under $9.40.

Overall the stock markets in the US are overbought, not having touched the 200 bar moving averages in years. The last visit on the weekly chart was in 2016. With the DJIA at 28, 652, the 200-week MA is 23,342. Given the uncertainty of all of the above plus the election, I would not disregard the potential for further weakness.

 

January 23 2020

Energy Rally Ends

The rally in energy has turned out to be a correction which has ended. West Texas Intermediate and Natural Gas in particular have reversed their trends closed at lower lows. Schlumberger has indicated its retreat from the US Market. Both Schlumberger and Halliburton, the two largest energy service firms are down another 2 % today. This reflects a world slow down as well as abundant supplies in the Permian Basin still waiting for pipe line completions.   We will publish more in our Sunday update.

January 17 2020

Dems, What’s the Problem?

 

The vote was 89-10 as an overwhelming majority of senators of both parties supported the agreement, as expected. Last month, the House of Representatives approved the revised agreement by a similarly wide margin,

Senate Approves USMCA Trade Deal 89-10

And in the same week, the Chinese apparently decided Trump will be the next US President and signed Phase One of a trade deal with the US. The thing to note is that the Chinese did not wait for the November election. They are not hoping to revert to another go along to get along, ‘yeah we know the Chinese cheat our pants off on Intellectual Property Rights but so what?’ that sounds like a bet on a Trump victory to me.

P T Barnum was the ultimate showman in his day but the Donald is surely his .The Democrats can’t wait to discard the the first two amendments to the Constitution as well as the Electoral College but roundly endorsed the document in Impeachment Proceedings this week. To cap it off several stock indexes hit new all time highs and Google topped a trillion in market value. Oh, and Trump held a rally in Milwaukee as the Democrats ‘debated.’ Years ago Democrat strategist James Carville noted it’s the economy stupid, and that has merit today.    Top that with record low unemployment for Hispanics and Blacks, and well, I am guessing Americans will vote their pocketbooks.

This column has taken the position that the energy sector hit a long term low last August.   Share prices and crude oil itself advanced to about $65. We have had the inevitable correction since, with crude up Thursday and another 36 cents today.

Predicting oil prices also requires a look at the entire energy complex. I would call for the low in crude oil based on the last couple of days BUT (gee there is always a but) heating oil set another low Thursday.   Let’s hope it turns up today.

Energy trusts like PBT and MVO had nice advances, Prudhoe Bay BPT jumped 50% since November but gave back a lot this week. The increase there and in Nustar NS and Alerian AMLP is also encouraging.

Natural gas futures like heating oil sagged again Thursday. Looks like it will test the August low at $2.05, now $2.08.

Our bottom line is this. The overall stock market is behaving like early 2018. Then there was a similar parabolic advance. That was followed by an eventual DJIA 3,000 point correction and up and down movement until a larger collapse in the fall. My take is that the FANG stocks are overdone here and a top is likely this next week. The surprise may be in beaten down energy and metals, if the US Dollar continues to weaken.

 

Oil Priced in Gold Nearing a Bottom

Wed Sept 23, 2015

Again there are three stages of a bear market, denial, acceptance, and capitulation. Yesterday in intermediate accounting one student asked if, and I quote, if there was any hope for energy companies. Now that is a perfect example of social mood approaching capitulation, i.e., give up. At that point investors toss otherwise valuable shares of companies overboard swearing to never be involved again. 

As Tom McClellan points out in his latest report, it is helpful to examine oil priced in something other than dollars. Or as our friends at Elliott Wave would say, real money like gold. This chart does just that.

Crude Oil Priced in Ounces of Gold

This ratio chart divides the price of oil by the price of gold. If one then multiplies the right hand scale by 100, we have the number of ounces of gold required to buy 100 barrels of oil. 

.04 x 100 = 4 ounces of gold, the left side would be likewise multiplied, instead of one barrel, oil is priced in barrels, we have one hundred barrels. 

To make the point I put the price of XOM Exxon Mobil on the bottom panel. 

The investing point is that the ratio chart has already reached a third important milestone since 1999. In 1999 oil fell to $12. And that was the time to buy XOM just over $20. The weakness in the stock market and continued over supply of oil along with bankruptcies and take overs in the oil  patch will not doubt drive energy shares lower. As noted, many service companies are already below book value. 

But the ratio chart strongly suggests the alert investor should be on guard for a final  low in the oil price. 

Overall stock market weakness here may not translate into energy share gains but one might certainly benefit from an investment in USO which tracks the oil price. This ratio chart lines up with our expected low in commodity prices at year end. 

The Eleventh Hour - August 2014

Friday August 8, 2014

Word Count 769

[email protected] / 210 232 1691

 

The Eleventh Hour

The world is a mess.

Former Secretary of State Madeline Allbright, this past month

The markets have not registered a final high, yet. But as our title suggests evidence mounts that a final high in both oil and stock prices  is likely to occur this fall. Remember that while talking heads on television bemoan high gasoline prices,  high oil and gas prices always move in lock step with a bullish stock market.  One breeds confidence in the other. However there are numerous warnings (the gathering storm) that the markets are over extended and likely to hit final highs this fall. Let’s take a look.

The first clue lies in the existence of cycles. The Dow Jones registered its first trip to the 1,000 mark in 1966. Eight years later it bottomed in December, 1974 at 577, retracing about 50% of the 1,000 mark. This fall will mark a two generational anniversary. Markets tend to alternate so this time we may record a forty year high from the low years ago. Amazingly, the Dow’s high in 1929 was at 390. The low in 1974 was a mere 187 points or about 50% higher in thirty-seven years. In addition we are five years out from the 2009 low.

Adjusted for inflation, the Dow Jones has made no progress since Year 2000. Which is to say that if the Dow Industrials  divided by the Producer Price Index, or the price of gold, it is at the same level now that was then. This suggests that the rise has not been as a result of any new productivity but as a result of the three trillion dollars the FED has injected into the economy. This resulted in new nominal highs in stock prices rather than raising the level of full time employment. By the way, a mere 47% of Americans now hold full time jobs.

Short term both stock indexes and the energy prices appear to have put in intermediate lows in early August. This should set the stage for a final push higher amid glowing reports of expanding auto and truck sales. That latter indicator is also a warning given where the car market was five years ago.  Already tractor and auto manufacturers are offering zero down payment and zero percent financing deals to clear out existing inventory.

Energy prices remain in an uptrend but like stock prices have just undergone a correction. Crude oil dropped ten dollars to the $97 area. Gasoline has dropped to $2.70. After spiking to $6.50 earlier this year, natural gas has apparently bottomed at $3.70.   The refining industry did not anticipate the production of abundant ‘lighter’ crude in the US. That coupled with the inability to ship the new production over seas and the lack of the Keystone Pipeline has kept West Texas Intermediate trading below the price of Brent North Sea crude.   Brent is trading at $105.44. The fact that crude is not trading at new highs is a further divergence in stocks and energy prices.

Junk bond prices are another indicator of market tops and bottoms. The leading Junk fund JNK bottomed at $16.15 in 2009. It topped in June at $41.42. Investors pulled a record $7.1 billion form junk bond funds this past week. Yields hit new lows under 5% this past month for junk funds. Money is moving out of junk in anticipation of the FED exiting bond purchases in October.  After a 2.4x rise in price, junk looks toppy.

Luxury goods makers are falling in price. Coach COH has fallen from $50 to $34.  Ralph Lauren RL has been stair stepping down from its high at $190 last year. One luxury stock in particular reflects the strength of the stock market and that is Sotheby’s BID. When investors feel confident, they bid up auction prices for collectibles. This is reflected in a strong price for BID. Sotheby’s topped just over $50 earlier this year. As I write Friday, August 8, 2014, BID is down a whopping 9.2% (just today!) to a new low for the year at $36.92.   Market tops are a process, not a simultaneous event. All these events taken together suggest the topping process has begun.

The Dow Industrials has pulled back from well above its moving averages at 17,133. It is now testing the longer term 200 day moving average around  16,348. That should set the stage for a final run up over 18,000.

As always we will update the forecast as we move into the fall.

Dennis Elam blogs at http://www.themarketperspective.com

A Crash In Oil Prices

Thursday Oct 16 2014

Word Count 782

Crash !

Social mood has moved to more extreme positions which has taken markets down around the world. We have been warning of such an event for the last couple of years in this space. It is here, now. Let’s examine the various topics in a quick over view of what has happened in the last sixty days and the implications that holds.

The Price of Oil and Gas

The price of West Texas Intermediate has fallen from $107 to $80.  It rebounded Thursday and Friday morning as I write. That is a 25% drop which has or will affect economies all over the world..  Many economists are taking the position that this will spur the economy. This makes driving cheaper. More people will drive to stores (retail is the basis of the economy) and spend their now extra disposable income.

I don’t think so. I believe the drop in the price of oil and natural gas, is indicative of a weakening economy that simply cannot afford higher energy prices.  Compounding the difficulty is there are few oil producing regions that which can afford the option of a lower cash flow.  This will affect numerous players in the oil market.

Russia

Vladimir Putin has fashioned Russia to be a commodity economy rather than a consumer economy. With Russia 50% dependent on oil revenue, this puts Putin much more in charge than if say some Russian version of Facebook had a say in what is going on. As long as Putin can bluster his way through various energy deals, as in the Ukraine, things are just fine. But if the price of oil drops 25%, the income to Russia drops 12.5%.

OPEC

Fractured as always, OPEC is doing anything but maintaining stability for the price of oil. The Saudis told the world this past weekend to get used to lower oil prices. They are lowering price to dissuade Western Countries from fracking and producing more oil. This makes sense from their standpoint. But, it is hardly an  assurance for cash strapped Venezuela or Nigeria. None of the  OPEC members seem interested in lowering oil  production.

Panic – Headlines

Stocks Swoon  in Frenzied Day, down 415 points

New Push to Check Ebola

Risk of Deflation

HBO  Plans Web Service, Netflix drops 25% in After Hours Trading

Wal Mart, McDonalds warn of Rough Spots Ahead

EU Central Bank Balks, Wondering What to Do

What It Means

There are various marginal economies (Kuwait, Iran, Nigeria) that have nothing other than oil to sell. To maintain cash flow they are more likely to increase production for cash, than raise prices. The result will be more supply in a world already awash in oil.

One can read various predictions that oil can be produced in the Balkan, Eagle Ford, or Permian with prices as low as $60. This assumes that bankers who lend on energy exploration or deaf, blind, and dumb. They are not. As fears of ever lower oil prices spread, the lending spigot will be cut off.  I have no idea at exactly what price that happens. But it will happen. 

Local governments in  the Permian Basin and the Eagle Ford have been wondering how they would cope with the demand for services. Careful what you wish for. Now imagine all those new residents are still here, but the without the foundation of ever higher oil prices. Suddenly property and sales tax revenue falls. But demand for services  is as high as ever. This is a real problem.

Meanwhile in Austin, the severance tax revenue will shrink. That means lower property taxes for the State of Texas and Texas Counties. Higher Education never saw this coming. State Universities should expect to be rebuffed at the Legislature when asking for more money, in capital and operating budgets.

Stock prices for companies drilling in the Eagle Ford and the Permian Basin have been hit hard. Sanchez Energy for example is down 50% in four months. In the 1973-74 bear market I termed this the black hole of the bear market. Stock capitalization, wealth in the stock market, vanishes as investors panic out of troubled sectors.

Finally, we have expected a top in the five year bull stock market this Fall of  2014. It is 40 years from the 1974 Dow low at 577. With the European Central Bank out of ideas on stimulating its double digit unemployment, China slowing, and Argentina and Venezuela already looking like deadbeat borrowers, the fundamental news is negative.

October has a reputation for the roughest month on Wall Street.  And as usual the economists never saw it coming.

Follow Professor Elam on the markets at

http://www.themarketperspective.com

 

A Social Mood Shift in Oil Prices

Friday October 10, 2014

Word Count 829

A Social Mood Shift for The  Fall

Wednesday and Thursday marked the biggest one day rally and worst one day drop for the Dow Jones Industrial average (^DJI) for all of 2014. That’s the first time those extremes have been hit on back to back days in nearly 17 years.

Jeff Macke, Yahoo Finance

Taken together, oil and stock prices are more likely to fall in tandem than for falling oil prices to stimulate stock prices. That is my minority view for what it is worth. This December will mark the 40^th year anniversary of the low in the Dow Industrials at 577. I suggest this might be a good time to be watching stock and oil prices, from the sidelines.

Dennis Elam in One on One, Sept 9, 2014

You can’t say I didn’t warn you….

This past week has seen volatility in stock prices reaching multi-year extremes. Moves, which used to take three days, now occur in one day. No doubt high frequency trading is the root of some of the up 250 Dow points up one day and then down the next.  But October has a deserved reputation as a crash month.  The meltdowns of 1929, 1987, and 9/11 all occurred in October. So here we are again.

Today we address the real question, what happened?  Oil prices were triple digit just weeks ago. Stock prices were on a tear amid cries of a new bull market from even long term observers. Now oil prices are down $20 and headlines report energy stocks are being crushed. The change is not so much in the market fundamentals but in the social mood of investors. Social Mood finally caught up with the reality of sky-high markets.  Let’s examine this phenomenon.

Social mood motivates social actions. Conventional wisdom has it that individuals are acted upon by the news, and then make decisions. But social mood is unconscious and internally regulated. For example, the price of oil in the spring of 2013 was $87.50. By August it hit $112.50. That is an amazing 28% increase. Did world demand increase 28% or did the supply fall by 28% in those few months?  No, but the social mood of the participants certainly expanded that much. If I have learned anything writing these columns, it is that the price of oil has little relation to supply and demand.

Last week I remarked on attending a conference on the Eagle Ford Shale play. I noted no one discussed the falling price of oil. Another large conference is slated for next month in Midland on the Permian Basin play.  Regardless of a string of correct predictions in this space, my telephone is not ringing with an invitation to speak. The reason is that my views do not fit the social mood of the organizers.

The S & P 500 soared from 1920 to 2020 in less than two months since August. Then, like Wiley Coyote chasing the Roadrunner over the cliff, social mood went in reverse. The S & P index is now testing the exact it low it up in during August. But by the headlines one might think it was Black Tuesday in 1929.  The explanation is that social mood moves in fractals. The mood can be massive compared to the actual price change.

Finally headlines are reflecting my long-standing skepticism over the durability of triple digit oil prices. One analysts reports that ‘if ‘prices drop another5 $4 or $5, companies will be forced to trim their capital budgets.’ (Emphasis added) I find the prediction of Robert Baird and Company intriguing  that ‘prices could drop to $53 in certain parts of the Permian and Eagle Ford and still be profitable to drill. ‘

To which a student of social mood can only reply, fat chance of that. Rather the more reliable prediction is that at some point on the way down, the social mood switch will be thrown from wild optimism to just plain fear. Capital budgets will not be trimmed; they will be slashed.  No one really knows the minimum price at which frocking enjoys price support. But I will bet few to no industry players will hang around to find out just where that break-even point may be.

And why is that?  Finally, social mood arises when humans interact socially. The process appears to be related to the herding impulse. It is all so typical that joyous celebrations, billed as conferences, on the Permian and Eagle Ford would be planned just two months apart. And it is just as likely they would be planned at the very pinnacle of positive social mood on the topic, After all extreme expression of social mood tends to occur near the end of a trend, not at the beginning.

Learn more about social mood and its outcomes at http://www.themarketperspective.com.

Dennis Elam is an Associate Professor at Tx A & M SanAntonio.

 

Oil Prices Slide Amid Massive Supply

 

Friday Oct 3 2014

Word Count 789

Oil Prices Slide Amid Massive  Supply

 

Taken together, oil and stock prices are more likely to fall in tandem than for falling oil prices to stimulate stock prices. That is my minority view for what it is worth. This December will mark the 40^th year anniversary of the low in the Dow Industrials at 577. I suggest this might be a good time to be watching stock and oil prices, from the sidelines.

Dennis Elam in One on One, Sept 9, 2014

That prediction has certainly come true a month later, as have all my concerns expressed in this space over the last year. Those specific concerns are that   supply will eventually trump demand resulting in lower oil prices.  This is part of a larger deflationary trend fueled by cheap money from Central Banks. As in 2007, the result is massive debt and higher asset prices for stocks and real estate, but little for job creation. Some Hedge Funds are now leveraged eight to one in their bets on higher markets.

The illusory light switch of social mood flicked to positive March 9, 2009. A 1932-1937 like stock and real estate rally ensued. But evidence mounts that social mood switches around the world are now turning down. Let’ s connect the news dots of social mood for the real explanation of what is happening.

As the price of oil fell from 1982 into January of 1986, the Saudis were the ‘swing producer of OPEC.’ The Saudis would limit production which kept prices then above $20. By 1986 the Saudis tired of being the balance. World production soared and the price fell to $12.  Wednesday this past week Saudi Arabia lowered its official selling price for oil. The message is market share rather than an attempt to shore up price. And so prices plunged to $8.18 Thursday before recovering to $91.40.

And remember, most of the prominent oil producing nations like Nigeria  for example, have nothing else to sell, but oil.

And, US refineries are set to undergo seasonal fall maintenance. This means fewer purchases of crude oil.  The perfect storm ensues as   excess supply is  met with lower demand.

The myth that Central Bankers actually control an economy is dying hard as EU  President Mario Draghi is learning. Inflation has weakened to a five year low. Translated, there is less and less demand for goods and services amid double-digit unemployment. The ECB is now waiting to see if ‘stimulus will lift the weak economy.’

Mario can check out the Paris Auto Show for an answer. Optimism for a turn in Europe’s log suffering car business that was evident a few months ago is dropping like autumn leaves.

Deflation is on display in both gasoline prices and gasoline components. A spike in supplies has sent US Ethanol prices tumbling to four-year lows. Ethanol futures slid 28% last month as falling domestic demand left US producers with the largest inventories of this year.  Note the existence of falling demand in the last two paragraphs.

And just to keep things on edge, the latest cyber attack affected about 76 million of J. P. Morgan Chase’ customers this summer.

Meanwhile positive social mood continues among the promoters of energy conferences. We spotted this promo for the Permian Basin Conference slated for November.

I attended an upbeat presentation on the Eagle Ford Shale by UTSA’s Economic Development Group. It can be viewed on line at http://ccbr.iedtexas.org/.

West Texas' Permian Basin is shattering records and expectations. And all signs point to continued growth. Oil production has surged from a low of 850,000 bpd in 2007 to 1.35 million bpd in 2013. And in May 2014 Permian Basin averaged a record 460 rigs — up 16% from the previous year to a level not seen since at least 1980.

The point here is that one could read the same headlines in this newspaper in 1981. What could go wrong?  The answer is that in 1981 we had a record number of rigs running nationally.  And that number kept expanding as the price fell. Are we now witnessing a repeat of that same scenario?  Indeed we have a 34-year anniversary of record rig count. This is cause for concern, rather than celebration.

September and October are living up to their reputation for exciting, downbeat months in the markets. And to be fair as I write Friday, stocks are rebounding. Volatility is back. But the deflationary forces we have written about for the last year are here in earnest.  It would be best to temper enthusiasm for production with a cautionary eye on prices.

Dennis Elam PhD CPA teaches at Texas A & M University San Antonio and blogs on markets at http://www.themarketperspective.com

Paper Barrels 9/19/14

Friday September 19 2014 6:11 AM CST

Word Count 689

Trading Paper Barrels

Energy service companies toil to bring in the real Texas Tea, barrel by barrel in the Permian Basin and the Eagle Ford. Traders in New York are a bit more clever; they simply create paper barrels and start trading. Today we look at various aspects of the paper trade and the new reality in Texas.

The Butter and Cheese Exchange of New York began trading in 1872. Later the Exchange did business in potato futures. These trades were subject to such outright manipulation that the Commodity Futures Trading Commission CFTC was created in the early 1970s to ride herd on such frauds. Today it is known as the New York Mercantile Exchange where billions of dollars of energy contracts are traded.

Arbitrage is the process of taking advantage of price differentials in the same commodity in different markets or at different time intervals. We have tracked the drop in the price of West Texas Intermediate to Thursday’s close at $92.03.  However the October 2015 contract is trading for $100.55.  So traders can buy the near term contract at $92.03 and sell one year forward at $100.55. The trader pockets the $8.52 difference. Even if the price of oil futures is higher when October 2015 arrives, since the trader is ‘long the spot market, he is able to ‘cover’ or close out the trade and provide product to the seller.

This has resulted in a phenomenon not seen since the price collapse of 2008. Then oil plummeted to $35. Sensing this could not continues, firms began leasing tankers to store the cheap oil, hoping to profit from and eventual price rise.  For example Sinopec has leased the 3.2 million barrel supertanker TI Europe. Sinopec is storing oil there. Speculation has it that there are now some 25-50 million barrels in tanker storage.

Two weeks ago in this space I reported that supply was simply outpacing demand. The result was lower oil prices, a prediction that has come true. While storing oil to take advantage of higher future prices may be a clever trade, it is hard to see how this will eventually raise oil prices.  When there is more and more of a commodity in storage but less demand the price usually has to fall for the market to absorb the supply.

In a related development we have the latest report form the Commitment of Traders COT regarding gasoline futures. This group has been betting on lower gasoline prices since 2005. Commercial traders are seen as the ‘smart money’ as opposed to the public. The commercials are now down to one of the lowest short positions since 2010. This means fewer and fewer of the sophisticated crowd are expecting lower gasoline prices. In the past this has been a precursor to higher gasoline prices.

One reason for covering their short positions is the recent rapid rise of the US Dollar. With uncertainty all around the world, traders have flocked to the US buck. The Russian ruble, the Australian Dollar, the Euro, and the British pound have all been pummeled to the downside. Now that 55% of the Scotts have voted to stay in the UK, it is likely we will see a bounce in some European currencies, and a correction in the US Dollar.  Since September 8, the British pound has risen from 161 to 164 apparently anticipating the Scottish vote.  The US Dollar is over extended on a short term basis and could certainly correct. Oil priced in dollars might bounce to the upside for the duration of a Dollar correction.

Meanwhile the US stock market is still on a tear.  It looks like the NASD is poised to re-visit its March 2000 high at  5,000. My hesitation on stocks is simply that the wild ride up can reverse in similar fashion. It has been several years since we had even a 10% correction  in the stock market . But for now the ever-reliable New York Stock Exchange Advance Decline line is still headed up.

Dennis Elam PhD CPA blogs on markets at http://www.themarketpersepctive.com