Risk-on! Risk-off! The markets seem to have adopted Mr. Miyagi's training methods for Daniel-san in the Karate Kid over the past two weeks.
The Powell Put is in full effect, and a quick check of the CME's FedWatch page yields a stunning conclusion. The Treasury markets are pricing in a 97.2% chance of at least one rate cut by the end of the Fed's December 2019 meeting. One month ago, that same probability was 54.2%, but Wednesday it was actually higher, at 98.1%, so I guess there is a limit to bullishness.
Those figures are just extraordinary, and are a clear attempt to influence the Fed. As Federal Open Market Committee members and non-voting regional bank presidents toe the dovish line this week, it is clear that the current FOMC has the collective spine of Aurelia aurita, the common jellyfish.
I am writing this column in New York City, where information this week just showed rents hitting an all-time high, but, sure, Powell's right, there's no inflation anywhere. I guess most Americans live not in shoebox apartments, but rather glass houses, as Powell seems to.
Anyway, investing is not about fighting the Fed, but reacting to it, and there is always collateral damage from risk-off sentiment moves in the markets like May's.
One example was the price of crude oil.
The front-month contract for West Texas Intermediate crude began May trading at $63.18 per barrel and ended the month at $51.38. It was a tough month for Texas, and futures prices for the global benchmark, Brent crude, posted a similar performance in May, beginning the month at above $70 per barrel and almost falling through $60/barrel Wednesday.
As Mr. Miyagi might say to an investor in commodities, "You must focus!" It is so difficult to do that with news of trade wars, tariffs, rate cuts and so on, but the fundamentals cannot be ignored. The oil markets were remarkably balanced with WTI at $60/barrel, and every bit of data that I analyze on a daily basis has increased my confidence in that fact.
So, as a trader, one can always take a reversion-to-mean outlook. Sell when markets are overbought, buy when they are oversold.
In crude oil markets, the easiest way is to buy the United States Oil Fund (USO) . USO dropped from $13.20 at the end of April to $10.75 Wednesday, and the current level of $11 still offers an attractive entry point, in my opinion.
The crude markets are currently in a state of backwardation, as out-months' contract prices are below the front month's, and that is the best time to buy USO, as the fund itself is relieved from the burden of constantly rolling over into higher-priced next-month contracts.
From an equity perspective, I am sticking with my two favorite energy names, one small-cap and one giant. I bought more Evolution Petroleum (EPM) for my clients this week near $6 per share, and am extremely happy to lock in the stock's 6.5% dividend yield, a payout that I believe to be rock solid. Similarly, I was buying Exxon Mobil (XOM) this week as the shares drifted below $71. A 4.8% yield on such a cash-generative company is truly a joy for an income investor.
As Mr. Miyagi would say, "Trust the quality of what you know, not quantity." Keep your eyes open and there are profits to be had in these schizophrenic markets.