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Has the Energy Market Hit Bottom?

Several years ago I attended a conference where several prominent hedge fund and private equity managers were speakers.  Perhaps the consistent theme amongst the presenters was the best opportunities present themselves when “blood is running in the street.”

Oil has been decimated.  Crude was down 19% in July and another 4% yesterday. Data from the Commodity Futures Trading Commission stated net long positons in West Texas Crude contracted 7% in the five days ended July 28, the largest five day decrease on record.  Hedge Fund exposure to crude is at a five year low.

Oil companies have been destroyed.   The 93 energy stocks in the Russell 2000 are now down 70% from July 2014.  The energy stocks in the S & P 500 have fallen more than 33% since their peak in June 2014 and not account for only 7% of the index’s capitalization, the least in over two decades according to Bloomberg.

No energy company has been spared.  Exxon which is one of the three triple AAA companies remaining in the S & P 500 is down almost 30% since June 2014 trading at levels last experienced three years ago.  It dividend yield of 3.75% is at a two decade high reports Bloomberg.  Wow!

Johnson and Johnson and Microsoft are the remaining AAA rated S & P 500 companies.

While I will acknowledge Exxon is not a 30-year US Treasury that carries the implicit guarantee of the US government, AAA rated Exxon now yields 90 basis points (0.90%) more than the AA+ 30- year Treasury.

Many attempted to catch a falling knife buying shares in energy companies believing the bottom was/is alluringly close.  The phrase “it is always darkest just before dawn” has been mumbled many times during the last two weeks.  Yesterday it felt as though energy companies were only entering the early evening hours.

It is dangerous, if not impossible to call a market bottom.  But there are truisms.  For example, no stock or market moves linear.  Second, cathartic selling is a prerequisite as fear is always more powerful than greed.  Third a bottom is only reached after there is capitulation in the strongest companies and outlook is extremely dour.

The comments in the preceding two paragraphs are similar but only the inverse to one’s penned in July 2008 when crude was staging an unrelenting advance, trading around $150 barrel.  Consensus thought crude would trade to $200 barrel by early 2009.

The financial crisis crushed oil and this $200 barrel target quietly slipped away.  What event will mark oil’s bottom?  Maybe for those bullish on oil, crude needs to be on the cover of Time Magazine, the ultimate indicator of a market top or bottom.

Commenting upon yesterday’s market activity, equites declined about 0.5% on the decimation of oil companies.  Treasuries traded higher.

Last night the foreign markets were down.  London was down 0.28%, Paris down 0.50%  and Frankfurt down 0.17%.  Japan was down 0.14% and Hang Sang down 0.02%.

The Dow should open nominally lower albeit oil is up about 1.50% from vastly oversold levels. The 10-year is off 4/32 to yield 2.17%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.