Archive for month: January, 2015
Tom Essaye Featured in Forbes.com – Stocks Struggling To Break Free Of Oil’s Slide
By Steve Schaefer at Forbes.com
It’s oil’s market, stocks are just living in it.
That’s the most common takeaway from the first few trading days of 2015, as the months-long punishing of oil prices and energy stocks keeps broader market averages mired in negative territory.
If oil, junk bonds and the ruble are rolling over, expect equities to fall in concert, according to Tom Essaye, author of the Sevens Report. When that trio is pushing toward fresh lows, “the stock market will go down in sympathy.”
Tuesday the trend continued, with a short-lived morning rally in stocks evarporating as oil prices slumped further below the $50 mark. West Texas crude dropped more than 4% to below $48 a barrel, while Brent slumped 4.5% to $50.71. The S&P 500 fell 1%, with energy its worst-performing sector by a wide margin.
FactSet senior earnings analyst John Butters points out that analysts still seem optimistic on the sector — energy is tied with healthcare for the highest percentage of buy ratings in any sector (57%) and companies like SchlumbergerSLB -0.04%, Kinder Morgan KMI -0.6%, Phillips 66 PSX -1.25%, EOG Resources EOG +1.16%and Williams Companies boast buy rankings from more than 80% of Street analysts who cover them — even though earnings are expected to fall more than 19% in 2015.
Citigroup’s Tobias Levkovich points to the chart below, which shows that while 2015 earnings expectations have plunged in the energy sector, 2016 have been little changed.
Perhaps that’s because analysts think the selloff is overdone and has created some undervalued opportunities. More likely it’s because the damage in the energy sector has come so rapidly the analysts haven’t even had a chance yet to turn their attention to future years.
At some level, bargain-seekers will think oil and energy stocks are worth buying, but Essaye warns that the true oil shakeout some are waiting for may be a bit further off than they think.
A global supply glut barreling up against weakening economic growth is a well-understood factor in oil’s slide, but another element Essaye points to is the potential breathing room oil companies have thanks to hedging strategies.
Companies that hedged their 2015 production at prices around $90 or more per barrel can likely stay afloat longer than outsiders like OPEC anticipated, given that those hedges are now “in the money in a big way,” according to Essaye. Net short positions held by producers have leaped from 15 million contracts in August to 77 million last week.
“Bottom line, shale producers are not yet feeling the “full on” pain from the roughly 50% selloff thanks to their hedging strategies,” Essaye says. “Sso we can expect production to remain high and fundamentals to remain very bearish.” He expects oil to head toward $45 a barrel in the near term.
In a recent letter to clients, Forest Value Fund’s Thomas Forester notes that the sliding prices in oil have been considerably worse than the broader declines in other industrial commodities, which might be explained away in part by the end of the Federal Reserve’s monthly asset purchases – which provided cheap money that sloshed into emerging economies like China’s – and the strengthening dollar.
http://www.forbes.com/sites/steveschaefer/2015/01/06/stocks-struggling-to-break-free-of-oils-slide/
4 Hedges for the Systemic Oil Problem
The plunge in oil prices has been a big scare for the markets, particularly since early December. As of this writing (Jan. 8), the cost of a barrel of Brent crude oil had fallen below $50, a key support line that could lead to accelerated selling from spooked traders. The selling in the oil patch has been the driving force behind the selling in stocks at the very tail end of 2014, and through the first few trading days of 2015. And while the bulls have managed to perk back up over the past couple of sessions, the fear of a continued oil slick that takes down the value of many risk assets remains at the forefront of nearly every perceptive investor’s mind.
Subscribers to The 7:00’s Report will recall that in early December, we gave specific recommendations for traders and investors looking to hedge those falling oil prices. The rational then was that if oil continues to collapse (and it has) then we could cause what I called “systemic stress” in the markets.
During the acute plunge in oil prices from Dec. 3 to Dec. 16, stocks also plunged, with the S&P 500 sinking nearly 5%. However, the combined performance of the four hedges that we recommended during this same time period (equally weighted) produced a stellar 6.9% return.
Now, I must go on record as saying that despite the plunge in oil prices over the past several months, I do not think we are about to see an oil inspired collapse in stocks (trading during the latter part of this week buttress that theory). I do, however, think that if you harbor the justifiable concern that oil prices will continue to fall, and that this will bring out more bears out of hibernation, then the following four hedges will keep your money safe from the systemic oil problem.
Hedge #1: ProShares Short MSCI Emerging Mark (ETF) (EUM)
We have recommended the ProShares Short MSCI Emerging Mark (ETF) (EUM) to readers for a few months now because we continue to believe that if we see systemic stresses begin to appear, they will hit emerging markets exceptionally hard, and very early. That’s because emerging markets have been some of the biggest beneficiaries of this multi-year stretch for yield, and the region has some of the most mispriced bonds on the planet. A drop in EM currencies and bonds will result in a drop in EM stocks, and that means holding EUM will allow your portfolio to rise, as this fund is inversely correlated to the benchmark MSCI Emerging Markets Index.
Hedge #2: ProShares Short High Yield (SJB)
Junk bonds are the canary in the coal mine for risk assets, and as such they tend to fall hard and fast with any type of systemic risk, including the risk of plunging oil prices. Taking advantage of a collapsing junk bond market is the ProShares Short High Yield (SJB), a fund designed to deliver the inverse of the high yield corporate bond index. The only problem with SJB is that, from a volume standpoint, it’s a trade-by-appointment fund (meaning it only trades around 30K shares per day). To combat this liquidity issue you can also short the SPDR Barclays Capital High Yield Bnd ETF (JNK) or the iShares iBoxx $ High Yid Corp Bond (ETF) (HYG).
Hedge #3: ProShares UltraShort Oil & Gas (DUG)
If oil keeps going down, then you’ll want to own an inverse oil fund that’s pegged to both the oil and gas services stocks. That’s simple enough, but why not own one that has a little leverage, and that delivers twice the inverse of oil prices? That’s what you get with the ProShares UltraShort Oil & Gas (DUG). Now, because of the leverage, this fund is a trading vehicle only, and should not be used for medium- or long-term holders. Yet for a properly timed flyer on falling oil prices, DUG can be a superstar.
Hedge #4: WisdomTree Europe Hedged Equity ETF (HEDJ)
I originally suggested this hedge as part of a “Long HEDJ/short SPX” pair trade based on the idea that the WisdomTree Europe Hedged Equity ETF (HEDJ) doesn’t have any energy exposure, and that energy stocks would weigh primarily on US equity indices such as the S&P 500. Due to fears of a Greek exit, or “Grexit” from the EU, this trade hasn’t really worked too well as an outright hedge. However, he logic behind this hedge still applies, and if the geopolitical issue of Greece and the EU are resolved, look to put this hedge back on for systemic oil risk.