After seeing major averages down for eight of the last nine sessions, it became time for a minor relief rally. China continues to point towards a relaxation of their still overly restrictive Covid lockdown measures, which should help up and down the food chain. Economic data continues to point towards a resilient consumer, who with higher wages, equity in their homes and elevated cash levels from the pandemic are still spending with gusto. Even though interest rates perked up a bit, technology stocks led the way, advancing 1.6%. The S&P, Dow Jones and Nasdaq had gains of 0.8%, 0.6% and 1.1%, respectively. Energy stocks were the only decliner, falling 0.5%. The range-bound action continues as we hope for that year-end Santa Claus rally.
As Jim Meyer noted on Monday, the positive surprise in new jobs created in November led to another market selloff, as this pushes the Fed to continue their tightening campaign. Again, this is a lagging indicator. Businesses are always reluctant to cut employees while revenues are holding up. Rehiring and training new employees is very expensive.
However, it is the trend that matters. This is a very slow-moving economic statistic. Outside of a Covid induced lockdown, growth does not stop on a dime. It is a grinding process that takes several months before finally impacting employee payrolls. However, our Fed is crystal clear about their intention to stop wage gains and purposefully bring forth a higher unemployment rate. They will succeed in this endeavor. The hope is that they do not exceed internal expectations. Things are moving in the right direction, but not as quickly as many hoped.
The trend is clear as you can see below. Labor markets are deteriorating, albeit slowly.
The price of crude oil has collapsed over the past six months, dropping from $111 per barrel down to a low of $77 this week. All of this comes while Russian distributions are being interrupted, global demand continues to outstrip supplies, and OPEC pulls back production. A continued drop in demand from China due to Covid lockdowns is primarily to blame for lower prices, but President Biden’s release of over 200 million barrels of oil from the United States Strategic Petroleum Reserve (SPR) and back-channel stuffing from Russian partners has created a near-term mismatch of supply and demand. Even with all of the rhetoric, still elevated prices at the pump, and ongoing complaints about the Governmental restrictions on drilling, the price of oil is basically flat over the past year.
However, stock investors do not believe the hype! The S&P Energy sector is up 53% on the year. Exxon Mobil#, after a disastrous 20-year stretch, has tripled in price since the pandemic and remains up 70% this year alone. Similar story for Chevron# and ConocoPhillips. The question is, what is going to happen from here? While the near-term picture is clouded by a possible (probable?) global recession, where demand will almost certainly drop, the other side of the coin is a reopening in China where Covid restrictions have brought oil demand to multi-year lows.
The long-term picture is a bit clearer. Commodities are simply a supply and demand equation. Several years of under-investment in finding new oil has been at the forefront of a recent rise in prices. Energy companies, regardless of political issues, have gotten religion and learned from decades of boom/bust cycles. Preserving cash flows, buying back stock and paying dividends are finally becoming more important than dig, dig, dig for new oil. Case in point, Exxon Mobil boosted their share buyback program to $50 billion over the next two years while keeping capital expenditures (finding new oil) flat, which is around $22 billion. This will put a cap on future production. While ESG factors, clean energy and a lower carbon footprint are important, none of them can replace oil and gas demand immediately. This is a multi-decade game. That leaves us with supply which can be summed up in 2 charts.
First, we have U.S. crude oil stocks nearing a significant weekly low and well out of the recent range.
Source: The Daily Shot
More important is considering SPR inventory levels as they approach 30-year lows. In 2010, there were nearly 750 million barrels of oil in storage in the United States. Today, that is down to 387 million. There is a plan to replace these releases, which will eventually take supply from the open market. Including the SPR, we are now at 30-year lows in available inventories with respect to oil. So far, demand is not turning down. Energy stocks are looking ahead at very tight, long-term markets.
Another Important Client Question:
As I have noted in previous letters, Tower Bridge’s clients always come up with great questions, and hopefully we can provide the answers. An important point came up again this week that is worth reiterating, which concerns cash on hand. In prior years, when Fed Funds rose and short-term interest rates rose, banks were quick to increase interest rates on customers’ savings, checking, and cash balances. Those days are gone. Most banks and custodians have been reluctant to pass along the recent rise in yield, which means your account balances are likely still earning very little.
Rest assured that there are alternatives that remain safe and liquid but require a little bit of work. Manually purchasing a money market fund is one option. Moving excess cash from your typical bank to another provider is another. Investing cash into T-Bills or CDs also could work for certain clients. If you have a lot of cash sitting in your bank, check out the interest rate offered, discuss options with your financial advisor. Going from a 0.5% interest rate to 4% could produce substantial income that was not available over the past decade.
Google came out with their Top Search results for 2022. Any guesses on what the top 5 searches for the year were? A few easy ones come to mind: Ukraine & Queen Elizabeth. Those looking for help on the hottest game, Wordle, also fit in the top 5. The next two are somewhat surprising until you think about population numbers and sports. Two of the top 5 spots belong to searches for India’s Cricket games vs England and South Africa! More can be found here: Year in Search 2022
Donny Osmond turns 65 today. Judi Dench is 88 and Felicity Huffman is 60. Lori Greiner, who made her fortune selling jewelry storage products, and later became a key contributor on Shark Tank, is 53 today.
James Vogt, 610-260-2214