WASHINGTON, July 21, 2015 – Whether it’s up or down on any given day, the most notable thing about the stock market’s recent action has been the steady, brutal hammering of commodity prices—particularly those of fossil fuels—particularly over the last three trading weeks or so. From its seemingly happy plateau around $60-62 bbl., West Texas Intermediate (WTI) suddenly began its sickening descent around that time, plunging rapidly to hover around $50 bbl. late last week.
Yesterday, WTI got smacked around again, breaking apparently weak support at $50 and briefly dipping to $49 and change before closing barely up once again. WTI has strengthened somewhat this morning, up at $50.87 bbl., a positive jump of 72 cents or slightly less than 1.5 percent on the morning, as of 11 a.m. EDT.
That’s scarcely encouraging, however, given a market that greatly fears a tidal wave of Iranian oil, which may or may not happen anytime soon. Elsewhere, given the continuing, fairly steady rig count in U.S. shale ranges, the bogey man of “peak oil,” like global warming climate change, seems to be one of the many fading myths of our time, at least for the next 10-20 years or so.
All of this, added to renewed dollar strength against the euro, means that the pressure is back on the price of oil at the source, even though some nameless, greedy capitalists in the fuel biz seem to be holding prices at the pump up around the prices we had early last fall before the oil glut was first perceived. (Funny how this works.)
The confusion and weakness in fossil fuel pricing is having a ripple effect on related industries like refineries and pipeline companies even if it doesn’t have much of a negative impact on pricing in those industries. But the ripple effect extends elsewhere as well, most notably this morning in currencies and interest rate sensitive issues like bonds and banks.
This morning’s brief uptick in WTI is becoming a self-fulfilling prophecy in a way. Analysts, who only yesterday were saying that absolutely, for sure, Janet Yellen and the Fed were going to start jacking up interest rates either in September or December 2015 because the smelled a whiff of inflation, this morning have changed their tune. Now, they say, because of the huge drop in the price of raw fossil fuels, the impact has spread to other commodities as well, including metals and materials, bringing us close once again to the chilling horror show we know as “deflation,” during which the price of everything starts going down, including your wages.
In a deflationary environment, raising interest rates is generally regarded as the dumbest thing a central bank can do. And so, our fair weather pundits reason, current developments in commodity prices will now force the Fed to wait on those interest rate increases until, until… well, until precisely when, nobody knows, except maybe later than September or December.
You sometimes wonder why all these brainiacs make the big bucks, while simple peasants like you and the Maven—who know full well these gasbags understand less about what’s happening out there than we do—have been making roughly the same sized paychecks we’ve been getting for the last 10 years or so. So much for justice in this world.
At any rate, the commodity-decline-ripple effect goes on. Sniffing deflation once again, the bond ghouls have eased off on dumping bonds, either standing pat or starting to buy a bit of fixed income here and there. This is causing a modest drop in interest rates, which had been steadily increasing in anticipation of that “for sure” Fed interest rate hike.
This, in turn, is now influencing the banks, given that they (and those who invest in their stocks) may now have to wait—again—for those golden days when they can loan to consumers once again at interest rates that will allow them to make a profit and their corporate officers to get big enough bonus checks to enable them to sell their tired, 3-year old yachts and buy trendy new ones. Yep. Looks like they might have to hold off until 2016, now, at least.
Completely discombobulated, like it was yesterday, U.S. stock markets are down hard as of the noon hour Tuesday, with the Dow down over 200, the broader S&P 500 off a modest 8.60 and the tech-y, biotech-y NASDAQ down a somewhat nastier 15, give or take.
The entire financial world across the globe is beginning to look like the non-plot of a Beckett or Ionesco absurdist drama. If you don’t understand how all this works, don’t feel so bad. No one else understands it either, although everyone on TV pretends to.
Today’s trading tips
In spite of the potential for renewed deflationary pressure, we still think regional banks are good for a long term bet right now, though that long term bet may now take a little longer to pay off than we originally thought just a week or three ago. Again, our faves are KeyCorp (Symbol: KEY), Huntington (HBAN), First Niagara (FNFG), New York Community Bankshares (NYCB) and, if they’d pull back for us a bit, Zions (ZION) and now BB&T (BBT).
On the other hand, RYF (equal weight financial ETF) is a good way to get into the banking and insurance action without the volatility of individual stock picks. It does include bigger financial institutions, however, which currently have their own discreet charms in spite of the Dodd-Frank rules that are still trying to strangle them.
We are stubbornly remaining in the newish, high-yielding limited partnership shares of Gaslog (GLOP), a limited partnership that owns and operates specialized, oceangoing tanker vessels that ship liquid, or liquefied, natural gas (LNG). GLOP has been getting killed lately, due to the not-necessarily-related drop in the price of oil (LNG is a specialized product) and to the fact that, although it’s Monaco-based, it’s really a Greek company, which doesn’t thrill many investors these days.
That said, GLOP is still recommended by many services, and is likely going to continue to hike its already roughly 8.5 percent dividend as it acquires more ships. There will be more pressure in this sector in the out years. But right now, there aren’t a lot of LNG-capable vessels out there, which does give GLOP some pricing power. But until fossil fuel resources in general regain some pricing momentum, the current situation is likely to put a lid on these shares in the short term.
On a large position, we’re currently down roughly 9 percent—our worst current position—but we’re hanging in there for the yield and for what’s usually (though not always) a post-October firming of oil and gas prices at the source.
We also continue to favor ETFs that follow pharmaceutical, medical, consumer discretionary and tech stocks. Such ETFs include XLV (general healthcare), RYH (equal weight healthcare, which is less volatile but less exciting), RYT (equal weight tech), and RCD (equal weight consumer discretionary).
That’s enough for now. We’re probably in deeper than we’d like this summer in a year where so many bets by so many advisors have proven wrong. But markets are like that sometimes, and over time, it’s generally better to be in than to be out.
But don’t look away from Mr. Market too long, even during vacation. This summer in particular, you might live to regret it.