OPEC Oil Slick

“To finish off, OPEC or any such cartel will lose to human innovation. US rigs continue to rise, OPEC members due to budgetary pressures cannot stick to the weak and loose production cuts agreed upon. As we said back in March: ‘Funny that, a cartel can work until real competition sends them packing. By that time they are so inefficient, they lose market share.’


 

To market to market to buy a fat pig Oil prices have been slipping over the last half a year, energy stocks in the US last night fell around one and two-thirds of a percent. West Texas Intermediate, which is also know as Texas light sweet crude, as a result of a lower sulphur (sulfur to others) content, is referenced in the US, where the delivery point is a town in Oklahoma called Cushing. For such an important commodity that is used for practically all transportation, the town itself is pretty small. All 8000 odd citizens. The town prides itself as being the pipelines crossroads of the world. It pretty much is in the centre of the US, Cushing.

At the beginning of last year, there was a direct correlation between the oil price and equity markets. I am not too sure if you recall that time? Let me remind you with a five year graph (for perspective), of both the price of WTI and the S&P 500. At first glance, you can see that there is very little correlation. At all. And then there was that period, where for roughly 45 days we were stressed that the banks, who have huge exposure to the oil and gas industry, were going to come undone. And as such, the whole market sold off. I have circled the period. But for the most part, there is little correlation between the price of oil and equity markets.

These graphs are courtesy of Bloomberg, absolutely magnificent, thanks for these. Oil prices, at least WTI, is now technically in a “bear market” which indicates more than 20 percent correction from the previous last high point. Huh? I really care very, very little for technical indicators, it means nothing other than a representation of the past. See the WSJ article titled Oil Returns to Bear Market.

We were talking in the office yesterday about the share price of US homebuilder Lennar. As you can imagine, in the housing boom/bust that was one of the causes of the financial crisis, the Lennar share price went from around 6 Dollars in mid 1997 to 66 Dollars in mid 2005, all the way back to 6 Dollars in late 2008. Back to 54 odd Dollars now. Looking at any ordinary graph, it looks like it may have been more mellow to engage in “Wingsuit flying”. My point about technical analysis is that it is only obvious in hindsight, and therefore a useless indicator of the future. That is my opinion, you may think otherwise.

To finish off, OPEC or any such cartel will lose to human innovation. US rigs continue to rise, OPEC members due to budgetary pressures cannot stick to the weak and loose production cuts agreed upon. As we said back in March: “Funny that, a cartel can work until real competition sends them packing. By that time they are so inefficient, they lose market share.” As the WSJ reports, US production is up 7.3 percent since OPEC announced their November cuts. Funny that ….

Session end the Dow Jones Industrial Average closed three-tenths of a percent lower, the broader market S&P 500 lost two-thirds of a percent, whilst the nerds of NASDAQ were the most sold off stocks as a collective, down a little more than four-fifths of a percent. The likes of Microsoft and Apple found themselves as losers in the same column as the expected Royal Dutch Shell and Exxon Mobil. As well as BP, down nearly three percent on the session for that stock.


 

Locally markets were driven by sentiment surrounding political interference and the currency continued to weaken through the session. It often feels like two steps forwards and back and it is like watching Bakkies Botha trying to do the tango with Schalk Burger. A whole lot of muscle and little finesse. I may be completely wrong, and I apologise in advance to the two of those fine rugby players, they were the best in their respective positions, perhaps not so much in tango vests and shiny salsa shoes strutting their stuff.

Resource stocks took another beating, down nearly two and a half percent on the day. Industrials and financials sold off less than the overall market, which by the close had lost nearly nine-tenths of a percent. And in fact is now lower for the year, after having been as much as 3500 points higher in mid May this year. For three years, and I know that we sound like a stuck record, stocks in Jozi in Rand terms have “gone nowhere”. In the same time period the S&P 500 in Dollar terms is up nearly 26 percent. And that is in hard currency.

The Rand has lost nearly 19 percent of the value to the Dollar over the same time period. And inflation has been around 5 and a half percent. You do the quick math in real terms to see what the JSE has lost in Dollar terms over the last three years, and that may be an accurate reflection of the economic quagmire we find ourselves in presently. The likes of Glencore, BHP Billiton and Anglo American were at the bottom of the pile (or the top of the losers leaderboard), there were 12 month lows for Basil Read, Spur, Sun International, Tsogo and Spar, as well as Harmony and Arcelor Mittal. Steel, retail, gaming, eating out and construction.

Outgoing CEO of Tsogo, Marcel van Aulock is quoted as saying: “People are so discouraged they’re even cutting back on wagering” in this Bloomberg article titled The President Who Caused a Recession. If you needed reminding that part of the crisis of confidence is as a direct result of political uncertainty, this article will enforce that thinking.


 

Linkfest! Lap it up

It looks like supersonic flight might be back on the cards in the next decadeSupersonic flight promised by 2023 as Boom announces airline orders. If I was the Australian and New Zealand governments I would be the top funders of these research projects, making their nations ‘less far’ and increasing tourism and business?

Since the ‘Great Recession’ savings rates have been on the rise. The same trend was seen after the Great Depression, having better looking personal balance sheets and less exuberant spending should also act as a buffer to major calamity down the road – Millennials Are Helping America Save More Money

The assumption here is that people continue to move to the city to find jobs. Another theory is that thanks to remote working and the ability to work while in self driving cars, there will be a shift back to less populous areas – These will be the world’s 10 biggest cities in 2030 – and none of them are in the US or Europe.


 

Home again, home again, jiggety-jog. It is international Yoga Day my friends. Whether you can do the Mountain Pose (Tadasana) or the Wounded Peacock (Pungu Mayurasana), give it a go, it may be good for your soul. Don’t forget your Pranamasana, the gesture with the one word that Yoga lovers know, Namaste. There is a little bit of a greeting for both the bulls and bears across the Asian seas, some Chinese stocks have been included in the MSCI index, leading to a slight boost in Shanghai, stocks in Hong Kong and Japan are lower. US futures are on balance a little lower …. we could start that way. Another celebration, Video on Instagram turns 4 today. How times have changed.


 

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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