Inspired by corporate earnings (that were good, not great), the market was able to come out of the gate Tuesday. All the key names beat on the top line, but the bottom line, not so much; this is a pet peeve for so many market watchers, including myself. The banks were solid and Skyworks proved Microchip CEO Stephen Sanghi was reckless when he threw the entire industry under the bus because his company had come up short (again).
However, on cue, equities began to fade into the last hour of trading as blue chips moved into negative territory; the NASDAQ held on for dear life. Nevertheless, the Russell saved the day and it continues on as if it is ready for an oversold bounce.
I liked the fact money flowed into small cap names, albeit in a very tentative manner, but it is clear that these names are attractive. Of course, the chart is in a perfect “death swoon,” and will need to close above 1,100 before smart money becomes aggressive.
Over a Barrel
I use the term "death swoon" for the Russell, and there's no doubt that's been the case, but “death swoon” can also be used to describe the amazing collapse of oil prices which is something to behold. There are a couple of reasons for the sharp decline in crude oil prices though excessive production exist from Libya and other Organization of Petroleum Exporting Countries (OPEC) members, and a slowing demand; perhaps there is a plot by Saudi Arabia.
The Oil Kingdom has been in this position before where they saw oil prices fall just over four decades ago. In the 1970s, the Arab Oil Embargo sent crude oil down to $35 a barrel by 1980. The actions of Saudi Arabia were deliberate and kept oil production low. This forced America to make drastic changes in conservation and also brought about massive non-OPEC discoveries that included the North Sea that saw demand collapse and the price drop to $10 a barrel.
| US Crude Oil Imports | |
| Aug 1979 | 211,072 |
| Aug 1985 | 96,547 |
| Aug 2004 | 324,258 |
| July 2014 | 236,310 |
US imports are at the same tipping point that eventually sent prices tumbling back in the 1980s. OPEC knows this, and must be nervous.
Shale Bust or Die Trying
This is all because of the US shale boom which produces "tight" oil. In 2008, tight-oil was 600,000 barrels a day; now it is 3.5 million and our imports are dropping.
The shale boom has been an economic miracle that McKinsey says will generate 1.7 million jobs by 2020. Perhaps, this is the last chance Saudi Arabia will have to derail this miracle.
So, instead of reacting to freefalling oil prices, the Saudis are going to keep pumping and expect lower prices. The thing is that many experts say the economic oomph of shale oil could dry up at $80 a barrel.
People think I'm nuts, but consider what happens if Saudi Arabia grabs share as crude and natural gas are mothballed; they can go back to production cuts, and their normal form of extortion and manipulation. At least that’s just a thought…
Message from Corporate America
Intel beat on the top and bottom line last night with a record quarter and positive guidance. Management also put to rest the notion semiconductors are in trouble... just Microchip (MCHP) is in trouble. CSX posted strong results driven by the energy revolution that lifted its chemical segment by 20% year- over- year. While management sees modest growth, the rest of the year’s expectations of double-digit earnings growth and margin expansion lend optimism to the overall economy.
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