pebblewriter

Month: June 2018

  • Update on Oil & Gas: Jun 4, 2018

    Two weeks ago, it appeared that oil and gas had finally topped out and were ready to do some backtesting. From Once More With Feeling:

    And, with a little over a week left before May’s CPI is written in stone, it’s time for CL and RB to implode — at least to their initial backtest targets. Even lower targets would put CPI back at 2%, but could be a drag on stocks.

    It’s now too late for May’s CPI to revert to anything close to 2%. The EIA reported May 2018 average gas prices at 2.81, a 21.9% YoY increase — which should put May 2018 CPI at 2.6-2.8% (up from 2.5% in April), depending on how creative the BLS gets.

    However, June 2017’s range was even lower than in May 2017.  Current prices would yield a 27.5% YoY increase. The last time gas prices increased that much was in February 2017, when CPI came in at 2.74% — the highest it had been since Feb 2012.

    Several interesting things happened on Mar 15, the day Feb 2017 CPI was reported.

    First, SPX rallied 25 points off the previous day’s close and 42 points off the previous day’s low – not a bad day for stocks. It touched off a 68-pt slump, however. Stocks wouldn’t top the Mar 15 highs again until April 25.

    Oil (WTI) prices fell 14.5% from Feb’s highs to Mar’s lows. Gas (RBOB) prices had fallen 11.3%. So, the seeds were already sown for a drop in CPI — which came in at 2.4%, 2.2%, 1.9% and 1.6% over the subsequent four months.

    About the only bullish development was VIX, which plunged 15.5% from the previous day’s highs to 10.6, among the lowest levels it had reached in the past 10 years.

    In other words, in the face of a mini-meltdown in oil and gas the algos were happy to take their cues from VIX.  Is it any surprise that VIX is dipping below its 200 DMA as the market is about to open this morning?

    As to CL and RB?

    Now that they have both tagged our initial downside targets, we’ll take a look at next steps, and what it might mean for stocks, bonds and interest rates.  For a refresher on the relationship, see: Oil & Gas, Inflation and Interest Rates: A Delicate Balance or Goal Seeking?

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  • Is Market Integrity Even a Thing Anymore?

    Want to know where markets are going?  Just check Facebook.  The stock, that is.

    As I pointed out in March [see: Facebook Flops] the stock is a very reliable indicator of overall market direction.  And, right now, it’s threatening new all-time highs.

    But, its accomplishment raises an important question: does it matter how the stock got to where it is?  What about market integrity and price discovery?  Do they matter?

    As we’ve discussed, each time FB tagged or dropped through its 200-DMA (the red line below,) the S&P 500 swooned — or even underwent a full-fledged correction.  The 2015-2016 correction is the most obvious.But, FB’s November 2016 dip was potentially more serious.  Not only did the stock drop through its 200-DMA, but it remained there long enough to produce a bearish death cross, where the 50-DMA crosses below the 200-DMA.

    The impending death cross could be seen a mile away.  So, after a week of the stock lingering below its 200-DMA, the FB board announced a $6 billion stock buyback plan.  The stock bounced a few times, finally clearing the 200-DMA on the very same day that the death cross occurred.  What better way to convince investors that the death cross wasn’t anything to be concerned about?

    Facebook doesn’t publish detailed transaction reports for stock buybacks; but, it seems likely that the shares purchased under the plan were timed to help the stock clear its 200-DMA.FB ran up to new highs, ignoring the 4.23 Fib extension as it had all the others.  A year later, however, it managed to drop back below its 200 DMA.   In the process, it completed a bearish Head & Shoulders pattern that targeted 133-140 — another 17-20% drop on top of the 13% it had already shed.

    After dropping through the neckline of the H&S Pattern, the stock couldn’t even manage a full backtest before plunging anew. The dreaded death cross occurred on April 13.  On the 25th, the company announced a $9 billion expansion of the stock repurchase plan.  This was particularly significant, as there was still $4 billion left over from the original $6 billion plan.

    The very next day, FB spiked up through its neckline and 200-DMA. Since then, it’s tacked on 25%.  Are any shareholders complaining?  Of course not.  Ditto for the many employees who own shares.  So, what’s the problem?  All’s well that ends well, right?

    I suspect most investors would agree with that sentiment.  There has been little outcry, even though 54% of corporate profits — over $5.1 trillion — has been dedicated to buybacks over the past 10 years.

    Prior to 1982, buybacks were prohibited.  They were considered a form of market manipulation. After passage of Rule 10b-18, however, corporations were offered a safe harbor as long as they met certain conditions.

    Supporters of buybacks say they are beneficial.  Over half of all Americans own stocks, even if indirectly through a 401(k.)

    Critics maintain that they are a financial engineering trick, inflating EPS even if profits aren’t actually growing.  Chrisopher Cole of Artemis Capital figures that 40% of EPS growth since 2009 is from share repurchases.

    NYU professor Edward Wolff says they benefit the rich more than anyone else, as the top 10% of households own 84% of all stocks.  Yale professor Robert Shiller calls buybacks “smoke and mirrors.”

    It’s safe to say that as long as corporate management can borrow money at historically low rates in order to drive their stock higher, the practice will continue.  But, it’s hard to look at a stock like FB without wondering whether market integrity is still a thing.

     

     

     

     

     

  • Is Good News Good Again?

    A solid employment report is being hailed as the reason for this morning’s rally.

    Yet, it’s hard to ignore the fact that USDJPY broke out……and VIX broke down overnight — hours before the report was released.  And, of course, futures also had a head start thanks to Trump’s early preview of the data.

    In other words, the algos were triggered and the ramp job was well under way before any data was released. Will it be enough for carbon-based investors to ignore the troubles in Italy and Germany?ES is testing the top of its falling channel.  Will it have legs this time?

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