Be careful what you wish for. That's what I keep thinking as this market has gone down because of weak oil. Don't kid yourself for a moment. With a couple of weeks till quarter's end, you started seeing people equate the industrials with the oils again, all ETF-like, taking down the industrials if oil ticked down even a tad.
That's the kind of moronic hedge fund linkage action we saw in 2008.
If you want a sustainable across-the-board rally, it cannot be led by oil. It can't even have oil in the equation. Oil has to stay in one place or drift lower -- otherwise, you'll see the pattern of almost every company having trouble making the numbers. That includes the oils, which will struggle due to demand destruction.
What should be happening? This week we should have seen stocks going higher, not lower, on the news of oil going down.
Why don't traders realize this? I believe there are still too many dopes that weren't wiped out by the last downturn who don't understand the energy cycle.
First: Outfits like Caterpillar (CAT) -- generic machinery-based industrials -- have one oil price that is good for business and one that is bad for business. Caterpillar does best when Brent crude is below $90 per barrel. You would know that if you listened to the company. So when oil soars to $126, that's not great for Caterpillar. When it comes down -- no matter how it comes down -- that's good, not bad. How do I know this? Because they tell us!
Second, if you listen to a company like Clorox (CLX), in generic consumer packaged goods, you'd know this: When oil declines, the price of commodities made with oil doesn't come down as you might think it would. The prices stay high. But if oil really gets hammered, then they can push for some price concessions. That means Clorox numbers will get hurt if oil doesn't come down.
We hear that we shouldn't worry about the shippers -- that they have fuel surcharges, so they are immune to the price of oil. Completely wrong: They get less business because customers don't ship as much when oil is high. There is less commerce. These companies are leveraged to commerce.
So cyclicals such as Caterpillar, soft goods such as Clorox and the transports all do badly when oil goes higher.
In fact, the only part of the energy complex that would be benefit if oil climbed would be natural gas, because there are very few beneficiaries of lower natural gas prices during the non-winter months. Not a single industrial company I know has said that the decline is bountiful -- not one. Not even the chemical companies have said it.
But the decline in natural gas is horrific for the U.S.-based complex -- because, with the exception of Continental Resources (CLR), almost every domestic oil-and-gas company is more leveraged to gas than oil. That's because the U.S. was thought to be out of new oil, but we had discovered a lot of gas.
A decline in natural gas has made drilling too expensive and put lots of people out of work. The decline in natural gas, I believe, has led to a slowing in the U.S. economy, making it that rare event where a commodity decline is actually bad for our country's growth.
So when you see oil down, don't think, "The economy's weak. I should sell." Think, "Phew, now the numbers won't come down so hard. I should buy!"
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