With Schlumberger’s (SLB) report Friday morning, the Energy sector weighting was reduced by selling the OIH. Despite very easy compare’s to Q1 ’16’s $28 – $30 crude oil nadir, there was very little “upside surprise” to the report and forward guidance was pretty cautious. The other reason for selling the OIH was that Halliburton (HAL), which reports Monday April 24th, has slipped below its 40-week moving average, and SLB and HAL constitute 32% of the OIH by market cap weight, the largest positions.
Clients are still long the XLE / IYE ETF’s.
There were several seemingly-bullish developments for Energy in the last few weeks and the price of crude oil continued to fall:
1.) The IMF raised both the global GDP and the US GDP forecasts.
2.) China growth came in stronger-than-expected last Sunday night, a pleasant surprise.
3.) The API and EIA inventory showed bigger-than-expected draws the last two weeks, and crude oil did nothing. This week, gasoline showed a little bigger build than expected, which could be at the heart of the problem, but crude oil fell 3.5% Wednesday on very little news.
Clients are now more neutral weight Energy directly, but with GE being a top-10 holding, and clients now owning Emerging Markets to the tune of 5% – 7%, including Brazil, there is still a correlation to Energy in client accounts that likely exceeds the 7% Energy market cap weighting in the benchmark.
This weekly earnings has a slightly different thread to it than typical Saturday posts, since as I thought about it this week, the correlations between the auto business (including Tesla, small long in Tesla), and Energy and Commodities and Emerging Markets was surprising.
President Trump and his team are expected to be out by the end of April with new emission standards for auto’s but California, which is the largest state by car registrations (as I understand it) has already said that whatever the Federal government comes up with, California will adhere to Zero Emission Standards or ZEV’s (zero emission vehicles as their goal). The point is that about 50% of the demand for crude per the IEA is for gasoline distillation, so as long-term gas demand declines as more EV’s (electric vehicles) are on the road, in addition to potentially more supply as as the rig count rises every week, is perhaps why crude oil has continued to see selling as it trades into the mid-$50’s.
Ford, GM, Chrysler, etc. supposedly wrote a letter to President Trump the day after the election requesting relief from the CAFE standards.
The point is with California going their own way on emission standards, the auto OEM’s may go the way of the PC giants of the late 1990’s, i.e. the market may make them obsolete far faster than their own lousy products of the last 30 years, and I actually think Ford and GM are making far better products today than at any point since the 1970’s. (Long more GM than F, both of which report earnings this week.)
And yet Ford’s and GM’s stock are trading poorly, possibly due to auto credit, falling used car pricing, etc. etc.
Don’t stop reading yet – let’s get back earnings:
Thomson Reuters I/B/E/S data (by the numbers):
- Forward 4-quarter estimate: $135.12
- P.E ratio: 17(x)
- PEG ratio: 2.1(x)
- SP 500 earnings yield: 5.75% versus last week’s 5.80%
- Year-over-year growth of the forward estimate: 8.29% vs last week’s 8.29% and down from the 8.96% high just prior to rolling into the April ’17 quarter
Analysis / Conclusion: Several high profile Energy companies report this week, including Halliburton, Exxon and Chevron (to name three). After their trailing 10-year return went negative in Q1 ’16, Emerging markets including Brazil had good total returns in 2016 as crude oil and commodities bounced. Alcoa and US Steel report this week, which are both well off their highs after the excitement of the election and the glow of the “return-to-global-growth” faded.
We get a slew of Technology earnings Thursday night and I expect the quarter’s to be fine. Alphabet is always volatile around earnings – it seems like it is routine for the stock to be up or down $25 – $50 post earnings.
The point of this post today is that so much of the Energy/Commodity/Emerging Market returns starts with crude oil. Commodities and the EM’s bottomed with crude in Q1 ’16 and then rallied for the rest of the year. If crude oil continues to slip, will the chain reaction begin again ?
The stock market action this week, particularly the rally on “tax cut talk” tells me fiscal policy still matters. I just with the President and Congress would “talk less” and get on the same page.
A weekly close for the SP 500 above 1,350 and a weekly close in the 10-year Treasury yield above 2.27%, and the 30-year Treasury bond above 3%, would indicate this very mild stock market correction is over.