WASHINGTON, February 3, 2015 – We learned from wire reports earlier Tuesday morning that U.S. factory goods orders dropped for the fifth straight month in December 2014. The Department of Commerce said manufactured goods orders fell 3.4 percent across the boards, and November’s previously more optimistic numbers were revised downward as well.
Looks pretty bad, right? Wrong. Following up on Monday’s surprise late day ramp and rally, stocks took off once again this morning, with the Dow up nearly 200 points earlier, and still up approximately 170 just before the noon hour.
Why the disconnect? Simple. Oil prices have staged a powerful comeback in the last few days, particularly Monday and this morning, rocketing up from lows in the neighborhood of $44 per barrel of West Texas Intermediate (WTI) to $50.75 as of this writing—roughly 13+ percent at this point. This, in turn, has caused great rejoicing among bullish stock traders who were beginning to believe the bears’ tale of woe with a fatal international deflation as the primary villain.
And so, the bulls grabbed hold of the market midafternoon Monday, and still don’t have an inclination to let go. Of course, it remains to be seen how long the jump in the price of oil can be sustained, or how high the per barrel price may go. But right now, traders don’t seem to be thinking about that much, sensing that the price of oil may have bottomed last week and is now on its way up for sure, for sure.
We take a more cautious stance here. Sure, it’s nice that a temporarily rising market tide will lift all boats, or at least a lot of them. The oil price drop has been dragging everything down, and we mean everything. Portfolios in 2015 have not been happy thus far. And, with the AFC Patriots winning the Super Bowl, the Super Bowl Indicator has spoken, declaring 2015 to be a down year for the market, adding to the potential for a “we’re all going to die” variety of stock trading gloom.
But, at least for the moment, the bulls are back again and the sun is out, so bullish traders are having fun.
Gold and a few other things are down and bonds are a little weak—if only because Apple’s (AAPL) big bond sale yesterday has sucked much of the wind out of that market, at least short term.
But everything else is more or less happy, so we’ll enjoy it while we can, though we continue to wear our skeptic cap.
As for oil: When the Maven read the ever-growing number of reports last week from the usual blow-dried TV and media suspects, flatly declaring that the oil price decline wouldn’t be over until the per-barrel price hit $30, $20, or even $15, he knew that these charlatans were either blowing it out of a place not generally meant for that; or, worse, not-so-subtly encouraging individuals and funds to dump shares in the oil patch because they themselves were buying them and wanted even cheaper prices.
Making things worse, the charlatan currently occupying the White House was out on the circuit, happily claiming credit for dramatically lower prices at the pump, given his clearly whole-hearted support for greater fossil fuel exploration and drilling.
In other words, the Obama Administration and the book-talkers of Wall Street’s Liar’s Lair were jumping the shark and making it likely that oil has now hit at least a temporary bottom, let’s say, somewhere around $44 per barrel. It’s never hit $40, at least on any charts we have access to. So let’s call price spread the theoretical bottom, just because.
Could it go lower? Sure. Will it? Who knows, although surplus oil or itchy big-time HFTs and/or wealthy bears could pound the price down again for an instant replay.
Will oil go a lot higher? Maybe. But probably not in the near future. We see black gold trading in the $40-60 range over the next few months and perhaps indefinitely. But, barring the blanket nuking of the Saudi oil fields (not beneath some of the murderous nut-cases who currently frolic in the Middle East), we don’t see oil anywhere over that range anytime soon.
The drop in the price of oil was never the End of the World As We Know It that the gloom-and-doomsters were proclaiming. Sure, workers in the oil patch have been laid off en masse in recent weeks, and some orders for steel pipe have been temporarily curtailed, hitting some steel mills. But, as things stabilize, at least some of those workers will be called back and we’ll hit some sort of equilibrium.
After all, oil prices stayed ridiculously high for a ridiculously long period, circa 2013-2014 with oil bulls keeping prices up by parading an endlessly depressing scenario of oil shortages, courtesy of rolling Middle East disasters, particularly in Libya, courtesy of this Administration’s cretinous post-colonial foreign policy.
But these clown princes of finance never bothered to notice the tsunami of domestic oil pouring into tanker cars and pipelines from across America’s fruited plain. When everybody began to notice the obvious late last spring, oil prices started to dribble down. The decline continued to pick up speed throughout the summer, before the Saudis kicked in the downside warp drive with their nicely-timed Thanksgiving announcement. You know the rest.
For now, the panic is over. But it could re-start at any moment, so let’s be on the lookout, particularly on the first tiny reversal in the current oil price rally. Volatility is very high right now, and the market has whipsawed very badly since the first trading day of the new year.
What this means is that even seasoned day-traders need to be cautious. Any move or headline that’s picked up by the HFTs can magnify any negativity with breathtaking speed. You could lose half your portfolio if you chance to leave your screen for a minute or two for a cup of java.
These are great days for those who have supercomputers in their spare bedrooms, but not so good for the average Joe—like the Maven—who can’t move with the speed of light with every trivial piece of alleged news.
Today’s trading tips
We’ve temporarily eliminated our modest position in the equal weight tech ETF (RYT) due to what appears to be a temporary downtrend, taking profits that were more modest than they might have been a week or so ago. Selling tech—save for Apple, seems to be the fashion right now, so we’ll get out of the way while looking to get back in when the nonsense stops.
Meanwhile, we’ve been slightly adding to our position in the 12-month forward oil ETF (USL), which seems to be less volatile than the more popular USO. Both have been up nicely during the rally in oil. But the second the worm turns (like any moment), we’ll scoot right back out again, hopefully with a modest profit. It’s been that way so far in 2015.
If you can cop a quick trade for even a 2-3 percent profit, you take it, or Mr. Market will take it right back. Multiplying these pitiful percentages to see what they are on an annualized basis makes us feel better about this. But as we get older, we’d prefer not to trade this frequently.
We may also look to get back into ETFs that cover the area of master limited partnerships (MLPs), which, like their underlying MLP elements have been positively flattened over the last few months by the oil price decline. Underlying MLPs have cut yields, obviously, to conserve capital, which will cause the MLP ETFs to cut dividends as well. But as this cutting levels out, we’ll again see some semblance of true yield in these vehicles and so are likely to sneak back into them again, albeit piecemeal.
We are strongly thinking of raising our bets in banking again. The gloom has been overdone here as well, particularly when it comes to regionals, some of which may not be subject to all the draconian regulations imposed by the overdone Dodd-Frank legislative monstrosity.
We picked up some First Niagara yesterday and are already doing nicely, although the overriding market volatility could change that in a New York minute. Nonetheless, we’re looking for comfortable longer-term holds right now and we think this is one of them.
We continue to hold Bank of America “A” warrants (BAC/WS/A with Schwab, but several different symbols in other houses), although we pared back our position recently, sustaining some losses.
While the government seems nearly done feasting on the Countrywide corpse they forced BAC to buy, surprise fines and settlements may continue to pop up for this bank. But the worst, at least, is very likely over and we should finally see a bit of recovery later this year in this hugely battered stock. Which, in turn, will goose the cheaper warrants proportionally higher. Or so we hope.
Some sector ETFs are also looking promising, especially REITs in the small cap arena. That’s because, at least for the next couple of quarters, even potentially robust large cap stocks will continue to suffer from the impact of the strong dollar on international sales figures. Small caps aren’t generally big enough to suffer this kind of international impact, so they’re likely to do better.
ETFs we favor—partially because, if you trade at Schwab like we do, they’re commission-free—are SCHA and SCHM (small cap and mid-cap portfolios respectively). Investors parked with other brokers will likely be finding other commission-free equivalents. Plus, there’s always the huge pantheon of Vanguard ETFs, most of which have mind-bogglingly low management fees plus generally great performance as well.
That’s probably enough thoughts for today. But always remember. Since the Maven is no longer a licensed investment advisor, you’re traveling at your own risk. Or, as Fox News might say, “The Maven reports. You decide.”
Have a good Tuesday.
*Cartoon by Branco. Reprinted with permission, via ComicallyIncorrect.