Someone's wrong: the airline sellers or the oil sellers. I know that the oils are heavier than 10 pianos but the airlines can't seem to hold their own, either.
Let's puzzle through both.
First, oil is reacting to four different stimuli: 1) the seeming end of the decline in the rig count; 2) Iran vowing to double exports; 3) a stronger dollar; and 4) the technicals, which are simply abysmal.
Now, with a charitable trust, Action Alerts PLUS, that has a substantial position in oil, we can't buy any more until it goes dramatically lower so as to at least affect our cost basis. But if I didn't own any, I would take a crack at the higher yielders at the $49-$50 level, betting that the impact of those four stimuli run their course down what amounts to a wholesale slaughter from $62 to $50.
The only problem is that wholesale slaughters lead to more wholesale slaughters in this market. I don't think the economies of the world are weak enough to justify a return to $43, where we were when production was still climbing in this country, which it no longer is. But I recognize that there is a level of liquidation that seems to want to force the issue. I remain a believer in the group because it represents value.
However, if you really want value you have to consider the airlines. Sure the near-term news is bad: a Justice Department investigation of pricing. Still, it is hard to see where that goes given that the Justice Department just approved of these mergers that gave such good pricing to the group. We also know that the CEOs are careful. They know they are under scrutiny so I don't think there are any smoking guns. Plus, there is genuine competition on more routes than not that long ago, hence, a proximate cause for the decline. I say "a proximate" because this group has suffered from a strong dollar, which breeds slower tourism, as well as a big jump in fuel.
And here's why things are getting interesting, particularly for Delta Air Lines (DAL). Most of the carriers report during the last week of July. But Delta reports on the fifteenth. The earnings estimate for the year for Delta is $4.40 per share. At $40, that implies a very low multiple. We have to figure that you get at least a 10% earnings hiccup. Let's say Delta's going to do $4 then. At 10x earnings that's a very interesting bet, especially if oil heads to where the bears say it is going -- namely back to $43 or worse.
So you have this kind of compelling situation where oil's going down, numbers have come down and the dollar seems to be holding. The only thing that makes it "kind of" rather than outright compelling is the sheer number of buys on the stock.
I say wait for oil to come down more, but the relative strength action does make the stock compelling for a bounce starting right here. The stock traded at $30 last October when oil was much higher. But that was before the disappointments set in.
The group is so horrendous that I figure we catch some downgrades between now when it reports so there is no hurry. But I think that the stock of Delta is more wrong than the oils, where we issued a report this morning saying they could fall another 5% before we are tempted to do more buying.
Now, you could argue why even bother? Biotech and domestics will do better first. I am not backing away from that. I am simply commenting about an anomaly: The airlines and the oils shouldn't both be down as hard as they have been and the selling in the airlines appears to be drying up as the capitulation in the oils seems to be growing.
Just an intellectual puzzle that's worth solving in order to catch a move that seems worth nailing even in a world where you want to reach for Allergan (AGN) and Kroger (K) before you would go for Delta or a higher-yielding oil, like the ones that represent great value (Occidental Petroleum (OXY) anyone?) but everyone's scared to death to own.