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U.S. And Europe Pan For Oil Independence. Oil& Commodities: Wobbly At $60. Stocks: No Rally In Sight?
by Dr. Joe Duarte,
U.S. And Europe Pan For Oil Independence
Energy Shift Begins
The European Union has agreed, at least in principle to increase its use of alternativeenergy and nuclear plants to fuel its energy needs starting in 2020, while the U.S. isworking on expanding its relationship with Brazil in order to expand ethanol use.
Brazil's President Ignacio "Lula" Da Silva made it clear that the U.S. andBrazil can focus on areas of common interest, such as alternative energies in order todiversify away from oil as the major source of energy. President Bush agreed:""Dependency upon energy from somewhere else means that you're dependent uponthe decisions from somewhere else. And so as we diversify away from the use of gasoline byusing ethanol, we're really diversifying away from oil."
Although the details of the plan between Brazil and the U.S. are still sketchy, the LosAngeles Times reported that the two nations "signed a memorandum of understandingFriday to share biofuel technology and promote its use by other nations in theregion."
By diversifying away from oil, the U.S., and to some extent Brazil, are making it clearthat they both want to move away from Venezuela, Latin America's largest oil producer.
The situation in Europe is parallel, as the European Union is working on becoming lessenergy dependent on Russia. Aside from moving toward nuclear power and biofuels, Austria'sleading oil company is aggressively negotiating with Iraq as a major source of oil. The EUis also working on increasing its infrastructure for liquified natural gas.
Halliburton Moves To Dubai
Halliburton (NYSE: HAL) is moving its corporate headquarters from Houston to Dubai, as thecompany increases its focus on its Middle Easteran and Asian business.
According to the Associated Press, citing an e-email from the company, the headquarters,including the offices of the Chairman, President and CEO will based in Dubai, although thecompany will maintain a corporate office in Houston.
Halliburton CEO Dave Lesar told a conference in Bahrain that "will relocate to Dubaifrom Texas to oversee Halliburton's intensified focus on business in the Mideast andenergy-hungry Asia, home to some of the world's most important oil and gas markets."
Fraud At Center Of Subprime Bust
As more is learned about the subprime mortgage bust, it is clear that it's just the sameold story, as corner cutting, sloppy accounting, and outright fraud continue to surface.
According to the Wall Street Journal, aside from sloppy business practices, companies likeNew Century, the emerging poster child for subprime evil, were fed by a seemingly endlessflow of cash from Wall Street.
The Journal describes a two pronged set of influences that led to the bust of New Century.
First, New Century outsourced much of its business to independent mortgage brokers, thuslosing control of key parts of the process for loan approval, such as making sure that theloan recipient could actually pay the mortgage: "by outsourcing much of its directcontact with consumers, New Century and other lenders also lost some control over thescreening of borrowers and the presenting of loan choices. Some lenders and industryconsultants say subprime lenders' dependence on brokers partly explains the industrywidesurge in mortgage fraud. In a typical fraud, lenders are duped into making loans based oninflated home appraisals or income data. Some schemes involve organized rings that takethe money and run without ever making a loan payment."
Second, while "the lenders made themselves vulnerable by relying heavily on outsidemortgage brokers and gunning for growth even as the boom faded," the Journal added"the Wall Street banks supplied the money to keep them on a roll, readily gobbling uploans and turning them into securities that global investors were avid to put into theirportfolios."
As we reported here on Friday, European investors are just starting to comb through thepackaged securities that they bought which may include significant amounts ofunrecoverable losses. Making things even more interesting is the fact that in some cases,the value of the actual securities in these packages is not known. The New York Timesreported: "Owners of mortgage securities that have been pooled, for example, do nothave to reflect the prevailing market prices of those securities each day, as stockholdersdo. Only when a security is downgraded by a rating agency do investors have to mark theirholdings to the market value. As a result, traders say, many investors are reporting thevalues of their holdings at inflated prices."
And the total extent of the problem is not yet known: "Already, more than two dozenmortgage lenders have failed or closed their doors, and shares of big companies in themortgage industry have declined significantly. Delinquencies on loans made to lesscreditworthy borrowers — known as subprime mortgages —recently reached 12.6percent. Some banks have reported rising problems among borrowers that were deemed morecreditworthy as well."
One thing is certain, though, the problems may be a lot worse than what is already known.According to the Journal: "Lenders loosened standards considerably in the first halfof this decade. Home prices were climbing so fast that borrowers who couldn't keep up onpayments could almost always sell their homes for a profit or refinance into a loan witheasier terms. That emboldened lenders to offer loans with little or no down payment.Sometimes they let borrowers skip burdensome paperwork such as digging out tax forms toprove how much money they made."
And adding fuel to the fire: "Subprime lenders took cues from Wall Street. Investmentbanks and hedge funds were ravenous for the riskiest types of loans, whose higher yieldsmade them vital ingredients in investment packages offered to investors globally. Newsubprime loans made in 2006 totaled about $605 billion, or about 20% of the total mortgagemarket, up from $120 billion, or 5%, in 2001, according to Inside Mortgage Finance, anindustry newsletter."
Conclusion
There are always many stories developing simultaneously. Today's column deals with two keythemes which are likely to remain prominent for a long time.
The U.S. and Europe are starting to seriously pursue energy independence away from oil.The fact that Brazil and the U.S. are talking about becoming partners, at least inpromoting ethanol as a viable alternative to oil is quite interesting. Equally interestingis Europe's sweeping move toward nuclear energy.
More than anything, the timing of the moves is interesting since they happenedsimultaneously, suggesting that there might have been some loose coordination.
Halliburton's move to Dubai, coming in the same time frame also gives the whole thing aconspiratorial sort of feeling, although it's just as likely that Halliburton sees thewriting on the wall.
The repercussions of Europe and the U.S. moving away from oil, aggressively,substantially, and at the same time are nothing short of momentous, even though at thecurrent time the moves are mostly conceptual.
On the subprime front, it's clear that there are likely to be many other shoes that drop.So far, though, the U.S. economy is holding up fairly well, since it seems as if the Fedhas left enough money sloshing around in the system to keep things from collapsing. <!---------- Oil -------------->
Oil And Commodity Summary:
Testing $60
Crude oil drifted lower overnight, although Oil and oil service stocks have beenimproving. The key to the oil stocks, though, is to be able to find niche companies thatare well positioned in the areas of exploration and production, as well as refining. It'snot at all a sector where everything is working any more.
And, due to the overall state of the market, there are no guarantees. Yet, a moderateexposure in key energy stocks showing some relative strength is not a bad place to be atthe moment, as long as one considers the potential for risk.
See our energy section for details.
The key for now, as we have noted remains gasoline, as refinery activity is still belownormal levels, which tend to be about 90% or so of operating capacity. There are stillsome key repairs ongoing, setting up the potential for a bit of a gasoline supply squeezeif demand starts to pick up as the weather warms up.
$60 remains key support for crude, with $65 becoming key resistance.
The Amex Oil Index (XOI) and the Philadelphia Oil Service Index (OSX), have shown someimprovement of late.
The metals markets might start picking up again, but for now there is no big hurry.
Gold is trying to find its footing. Visit our metals section for more details.
Chart Courtesy of StockCharts.com
The Wilderhill Clean Energy Index is trying to hold up above 180.
Chart Courtesy of StockCharts.com
Crude oil prices still have support at $60.
Chart Courtesy of StockCharts.com
The Philadelphia Oil Service Index (OSX) is back above 200.
Chart Courtesy of StockCharts.com
The Amex Oil Index (XOI) is still trading well below 1200.
Technical Summary:
Chart Courtesy of StockCharts.com
No Real Change In Outlook
The market mostly yawned after all was said and done with the employment report leavingtraders with lots of unresolved issues. The most important ones are whether the bottom hasbeen put in, and if so, how long will it be before the market can mount another rally.
If history is a guide, the market is not out of the woods by any means, and it will takeseveral weeks before the recent damage gets sorted out.
So, if anyone is in a hurry to make money, the odds are that they will be verydisappointed over the next few days to weeks, as the action is likely to be very herkyjerky.
The fact remains, that the market is on the defensive, and that it will take either time,or some kind of significant external event to deliver a sustainable turn around.
The major indexes are still above their 200 day moving averages, remaining in long term uptrends, although some sectors have been hit quite hard, such as the drugs and the REITS.
Long term support for the Dow is near 11,800, and for the Nasdaq is near 2284. The S &P 500 has support at 1345.
Remember, no one knows what this market will do. So don't be fooled by pundits andanalysts that claim to know. Let the market guide your actions.
Yes, at some point, we'll have a buying opportunity. That point may be as early as today,if the employment report is seen as bullish by traders.
So, we wait, we compile a shopping list, and if the conditions are right we start buyingover the next few days.
For now, we'll stick with our forecast. From a longer term stand point, based onhistorical trends, this should be a positive year for stocks, given the fact that it's thethird year of the Presidential Cycle, which calls for rallies in the third and fourthyears of a presidency.
Our long term forecast remains upbeat, unless the major indexes fall convincingly belowtheir 200 day moving averages.
What To Do Now
Be prepared to move back into stocks aggressively, but also be prepared for false startsand continued volatility.
Disciplined traders who follow our strategies should have been stopped out of most longpositions by now and should have large amounts of cash.
Stay patient, keep a good eye on any open sell stops. Aggresive traders should be payingspecial attention to open short sales which might get stopped out as the market tries torally in the next couple of days.
The REIT sector's fall might stage a short term comeback, so this is an area to be verycareful if you're a short seller.
Visit all our individual sections, both our ETF and individual stock picks daily for newideas, and changes to open positions.
Now, more than ever, it pays to be careful. So, be very methodical about monitoringportfolios, adhering to trading rules, and ratcheting up sell stops is clearly still here.
Second guessing decisions, and hoping that things will turn out o.k. in the long haul, isthe recipe for disaster at a time like this in the market.
Check all our sections daily. See tech, biotech, Fallen Angels, and timing systems forthe latest adjustments. Our ETF trading systems for energy, Spyders, Small Caps, andtechnology have also been updated.
Chart Courtesy of StockCharts.com
Sentiment Summary:
Fear Eases
Option buyers are starting to get less worried, suggesting that volatility may calm downin the next few days, although with options expiration approaching that may not be the wayit works out.
The key when a bottom is forming is to see how fast the bearish sentiment evaporates. Andso far, there is still enough worry in place to keep things somewhat stable.
Volatility indexes, see below, shot way up last week, but are starting to come down,another sign of rising complacency.
Option players hit the panic button just before the market crashed, and have remainedfairly worried since then.
The index put/call ratio was nearly 4.0, on Friday, 2-23, which is very rare . Frankly,we're still not sure what to make of these readings other than to note them and wonderwhat somebody with big bucks thought they knew on Friday. We'll be watching the situationcarefully.
Longer term indicators have continued to suggest that market sentiment is still not out ofthe woods, though.
The UBS sentiment index, fell for February, although it remained at very high levels. Theindex rose to the highest number we can recall in January, setting a very cautionary tonein the market.
The CBOE Put/Call ratio checked in at 1.02 on 3-8, falling from 3.87 registered on 2-23. Aconsistent string of low readings can be a sign of excessive optimism and often signals atop in the markets. Readings below 0.5 are of concern, but not as serious as readingsbelow 0.40. Readings above 1.0 are bullish. The numbers cited here are meant to beevaluated on a closing basis.
The CBOE P/C ratio for indexes checked in at 1.31 falling from 2.22. This could be abearish sign. Numbers above 2.0 as the market sells off, often lead to rallies. Readingsbelow 0.9 suggest too much bullish sentiment, just as readings above 2 are usuallyrequired to mark major bottoms.
The VIX and VXN had readings of 14.29 and 19.79. These are bullish readings. But they arenot necessarily a sign of a bottom, yet. A fall near or below 20 on VIX and 30-40 on VXNis considered negative, a fact that is usually confirmed when the volatility indexes beginto rise. Readings above 40 and 50, respectively, are often signs that a bottom may beclose to developing.
NYSE specialists were light of stock on the week of 2-23, after two weeks of buying.Specialist short selling remained at very low levels, though. Rising short selling fromspecialists is usually a very bearish sign.
Market Vane's Bullish Consensus was at 65% on 3-9 remaining unchanged. The UBS sentimentindex fell to 90 in February after registering a reading of 103, a downright scary number,and the highest one we've seen in January.
Exxon Starts To Stumble
Exxon Mobil (NYSE: XOM) is starting to stumble, just as oil prices are threatening tobreak below $60.
Chart Courtesy of StockCharts.com
Exxon has been a decent bellwether for the most recent rally in oil, after losing itsstatus for a long time. As oil fell from $80 per barrel, Exxon held up fairly well, andactually moved to new highs, correctly predicting the bounce back above $60 for crude.
The problem, though, is that as crude bounced back, Exxon remained weak, never movingclose to its recent high of 79, setting up a divergence.
The market is starting to worry about the earnings of big oil companies, since they can'tmake as much money from $60 oil as they can from $80 oil.
Exxon has long term at the 69 area, its 200 day moving average. A sustained break belowthat would likely lead to another down leg for the price of oil.
Chart Courtesy of StockCharts.com
The Amex Biotech Index (BTK) is still below key support. The 780-800 area is importantresistance.
Chart Courtesy of StockCharts.com
The Amex Pharmaceuticals Index (DRG) has been increasingly weak of late.
Chart Courtesy of StockCharts.com
The Philadelphia Semiconductor Index (SOX) has held up better than the rest of the market.
Chart Courtesy of StockCharts.com
Small stocks made new highs recently, but fell along with the market recently.
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