Big Oil For the Long Run?

Fred Imbert and Yun Li report the Dow drops 200 points, S&P 500 and Nasdaq fall for third straight week:

Stocks fell on Friday to end a volatile week as investors continued to dump shares of high-flying tech companies. 

The Dow Jones Industrial Average slid 370 points, or more than 1%. The S&P 500 dropped 1.7% and the Nasdaq Composite fell 2.2%.

Those losses put the major averages on track for their third straight one-week losses, which would be their longest weekly losing streaks in about a year. The S&P 500 and Nasdaq were down more than 1% each week to date; the Dow has lost 0.3% in that time. The S&P 500 also hit its lowest level this month after reaching an all-time high on Sept. 2.

Shares of Apple dropped more than 3%. Microsoft and Alphabet also pulled back by more than 3% along with Amazon. Netflix slipped 2.3%. Facebook was down by 1.5%. Oracle, meanwhile, slipped 1.1% after the U.S. government said it will block all TikTok and WeChat downloads in the country on Sunday. Oracle is trying to take a minority stake in TikTok-parent ByteDance.

Big Tech is down broadly week to date. Facebook and Amazon have each dropped more than 5.5% week to date. Alphabet, Netflix, Apple and Microsoft are also down sharply over that time period. For the month, all six stocks are down more than 11%. Apple, specifically, has plunged more than 17% in September. 

“We’re seeing short-term under performance from these stock but also outperformance over the long term,” said Mark Travis, CEO of Intrepid Capital. However, he noted that tech’s struggles are likely to be short-lived. Many of these companies “generate a lot of cash and have impenetrable balance sheets. They are also ubiquitous in terms of people’s use of them.”

The S&P 500 tech sector was down 2.6% and was on pace for its first three-week losing streak since September 2019.

Friday’s moves come as a series of individual stock, ETF and index options are set to expire. This could lead to volatile trading as small and large investors alike unwind these positions ahead of the expirations. 

 “If you look at the options activity, we knew it was elevated in the technology names for the month and the quarter,” said Art Hogan, chief market strategist at National Securities. “It’s definitely going to have a large influence on the underlying activity...It’s probably had an impact on stocks today and earlier in the week.”

Wall Street was coming off a sharp drop in the previous session as investors were on edge about the outlook on further coronavirus stimulus as well as the timing of a viable vaccine. Republicans and Democrats are still struggling to agree on how much aid to continue to provide in a follow-up bill to the previous $2 trillion package. President Donald Trump said Wednesday he liked “the larger numbers,” urging GOP lawmakers to go for a bigger coronavirus stimulus, but his comments left Republicans skeptical.

“The signs point to a decelerating U.S. economic recovery and increasing thematic risks,” analysts at MarketDesk Research said in a note. “It feels as if the bullish market narrative is changing in real time. Given all of the headline risks, we would error on the side of caution in the coming months.”

Meanwhile, the path to a Covid-19 vaccine, which is critical to the economic recovery, still seems unclear. Health officials said vaccinations would be in limited quantities this year and not widely distributed for six to nine months.

“A safe and transparent vaccination process is critical to encouraging widespread inoculations once effective vaccines are identified and tested.” Mark Haefele, UBS Global Wealth Management’s chief investment officer, said in a note. “In our central scenario, we expect widespread vaccine availability by 2Q21.”

It's Friday, has been a long week so let me get right into it as there's lots to cover on markets.

First, late this afternoon, President Trump said the US will manufacture enough coronavirus vaccine doses for every American by April, putting him at odds with CDC Director Dr. Robert Redfield said earlier this week that the US wouldn’t start vaccinating people until November or December at the earliest and the doses would be limited at first. 

Dr. Redfield initially said a vaccine wouldn’t be widely available until the summer or early fall of next year before walking those comments back after Trump said he was mistaken:

Welcome to the final stretch of US election season, my prediction is we are going to be hearing a lot about the "vaccine" and how everyone will be vaccinated early next year.

My prediction? Don't expect widespread vaccine availability by 2Q21, it will be more like the third or fourth quarter if we're lucky.

Luckily, there is some good news on the treatment front but we need to be patient:

Till then, wash your hands often, wear your mask in public, keep your distance from people (or avoid them altogether), take your daily dose of vitamin D, eat properly and get plenty of sleep to make sure your immune system remains strong.

There's no "magic bullet" for COVID, if everyone adopted the steps I outlined above, we would collectively beat this bloody virus with or without a vaccine.

Alright, back to markets. Here is the performance of the major S&P sectors over the past week (price returns, not total returns):

No,  your eyes aren't deceiving you, Energy (XLE) was the top performing sector this week, up 2.9%, followed by Industrials (XLI), Materials (XME) and Healthcare (XLV), each gaining roughly 1%. Consumer discretionary (XLY) was the worst sector, down 2.3%, and that's mostly due to the pullback in Amazon (AMZN).

Interestingly, here are the 5-year weekly charts of Energy, Industrials and Materials:

A few brief comments. I'm bullish Energy over the long run here. I know it's not "ESG sexy" to recommend traditional energy companies but they're selling at historically low multiples, providing great dividends and five years from now, they will be selling at materially higher prices.

Now, someone on LinkedIn posted BP's Energy Outlook 2020 and it has a bunch of bearish graphs on oil demand plummeting. 

Initially, I found this report concerning, then I spoke to a friend who told me to "ignore it" because "BP is still reeling from the Deepwater Horizon oil spill that occurred ten years ago and it wants to promote its shift to renewable energy to score ESG points with investors."

My friend has been buying Exxon Mobil shares (XOM) lately and he plans on waiting them out, like he did with Home Depot (HD) years ago when it fell to $25. "Exxon won't cut its dividend, it will continue borrowing to make it and what will likely happen is they will cut capital expenditures and that's when shares will really take off."

In the short-term, however, he agreed with me that anything can happen as there may be one final washout in energy shares going into year-end, but that remains to be seen and they could just as easily continue to rally based on the Economist's cover:

Just keep this in mind, Exxon (XOM) and Chevron (CVX) make up almost 50% of the Energy ETF (XLE), so either one of them is a good stock to pick or stick to the ETF (XLE).

Industrials (XLI) have been on fire since bottoming in March led by components like Union Pacific (UNP), Honeywell (HON), United Parcel Service (UPS), 3M (MMM), and Caterpillar (CAT). Even General Electric (GE) woke up this week to join the industrials party.

Will they make a new high? There I'm skeptical unless we see clear evidence that global growth is coming back strong or emerging markets are ready to take off. 

And right now, I'd say emerging markets shares (EEM) are at a critical point and look ready to roll over:

So, based on this, it's hard for me to get all excited about Industrials making a new high.

The same goes for Materials (XME) which have had an incredible run lately led by Newmont (NEM), Freeport (FCX) but also smaller components like US Steel (X) and Cleveland Cliffs (CLF) .

For me, these are tradable rallies but don't overstay your welcome, I'm much more comfortable in Energy if you want to play the long game.

What about tech shares? I'm bearish but admit you might see a bounce off the 20-week moving average in the near term and one last hurrah going into year-end:

We shall see, but my inclination is to sell any tech rip and if you're looking to buy the big tech dip, wait till you see the Nasdaq-100 plunge below its 200-week moving average.

That might sound "catastrophic" to Nasdaq bulls and hedge funds loading up on tech shares but truth be told, the top Nasdaq heavy hitters are selling at ridiculous multiples and it's such a crowded trade that if something goes wrong, these stocks are toast.

The problem with tech is if it tanks, it will bring the entire market down:

So be careful investing in the S&P 500 ETF (SPY), it is vulnerable to a tech wreck.

Alright, I was going to discuss Ray Dalio and the crisis of capitalism but think I'll leave that for early next week, I've covered enough here and want to rest a little as it's been a long week.

Still, Dalio spoke to Bloomberg's Erik Schatzker earlier this week stating that very large deficits are on the way no matter who is elected in the 2020 presidential election and says he's very concerned about U.S.-China tensions. Take the time to watch this clip.

And Paul Sankey, Sankey Research analyst,spoke with CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Brian Kelly and Pete Najarian three weeks ago stating Big Oil isn't dead forever. It certainly isn't so be weary of those Economist covers.

Lastly, and most importantly, listen to this BNN Bloomberg interview with Eric Nuttal, Senior Portfolio Manager at Ninepoint Partners, discussing his market outlook for oil and energy. He rightly points out demand is normalizing but supply has been significantly reduced, in some cases permanently, so when a supply shock hits the market, it will be explosive.