We give thanks to all our readers and wish you a safe and Happy Thanksgiving!
Oil prices hit a seven-year high in the US in late October. And as oil prices and inflation moved steadily higher this year, President Biden’s approval rating moved steadily lower. This, coupled with the razor thin majorities in both chambers of Congress and midterm elections on tap for next year, intimates the Democratic Party could lose seats in the 2022 elections. In short, this situation demanded action and is the catalyst for President Biden’s announcement this week. He authorized an historic 50 million barrel release from the US Strategic Petroleum Reserve and he also stated in his press conference that he will ask the Federal Trade Commission to investigate the gasoline industry for price gouging. This was his Thanksgiving gift to American households.
However, there was not much response from the financial markets or from energy prices. Simple logic explains why. China is the number one importer of energy in the world, and it currently imports more than 10 million barrels of oil a day. The United States ranks second in imports at about 6 million barrels per day. This total of 16 million barrels of imports and Biden’s 50-million-barrel release of strategic reserves equates to the import demand from just these two countries for three and one-eighth days. In short, the action is highly symbolic, but close to meaningless.
Biden did ask a broader group of countries to release oil from their reserves including India, Japan, and South Korea, which rank third, fourth and fifth, respectively, in terms of imports. Still, we do not believe it will have a significant impact on energy prices. Moreover, strategic reserves are “strategic” which means they are held aside for important emergencies. The current supply/demand imbalance of energy is not a true emergency, in our view. Like much of the current inflationary cycle, we believe it is man-made. The main culprit for soaring energy prices is the mismanagement of US energy as the administration attempts to force the country to green fuels. Inflation is driven by the historic fiscal and monetary policies implemented globally and maintained even throughout the global economic recovery. It is basic economics.
What would shift the energy supply/demand balance would be to restore the XL pipeline and to remove newly installed regulations on the US energy industry. This could immediately bring back the 2 million barrels per day of natural gas production that has been lost this year. And it would be long-lasting. This would be a sensible action, particularly since in terms of the environment, gas is one of the cleanest fuels available. We believe it is possible to support and incentivize renewable green fuel production and usage, while still allowing the US energy industry to produce shale and natural gas during the transition. But the right way in our opinion, is to find a joint public/private energy agreement that has a goal of a green renewable energy environment. The wrong way is to punish the oil and gas industry and the average American household.
And we doubt that an FTC investigation of the gasoline industry will find much, if any, price gouging or have a lasting impact on gasoline prices. On page 3 we show a NYMEX chart of the spread between gasoline futures and WTI futures. There is a natural lag between the price of oil and gasoline prices, yet they tend to ebb and flow within a predictable range. The current index of 17.19 is practically in the middle of the six-year range of 5 to 25. In short, price linkages look normal and an investigation is not apt to find anything untoward in the markets. But it does make for good political theater.
Markets and Technicals
The market is in the middle of its most favorable time of the year — November through January – and quantitative easing although slowing, still continues. This is a positive backdrop for equity investors. Third quarter earnings results have exceeded expectations and the recent round of earnings releases from retailers have been surprisingly strong. See page 6. These factors are supporting stock prices. However, we believe there will be many changes in the financial landscape as we move into 2022. We have written about all these issues in recent weeklies: 1.) energy-driven inflation, 2.) decelerating earnings growth, 3.) historically high ownership of equities, 4.) the risk of the Fed raising interest rates and 5.) the risk that China’s weakening property sector poses to the Chinese economy and perhaps the global banking system. All in all, December should be a time to prepare one’s portfolio for the changes ahead.
Technically, there has been little change in the indicators this week. The Dow Jones Industrial Average and the Russell 2000 hit record highs on November 8 and the S&P 500 and Nasdaq Composite index did so again on November 18 and 19, respectively. See page 7. The Russell 2000 index continues to be a focus for us since it is a broader-based index and driven less by the large cap technology stocks. And we would point out that the recent breakout by the RUT from an 8-month trading range is bullish for the intermediate term, but the index has weakened recently. This pattern of weakening is also seen in several breadth indicators.
The 25-day up/down volume oscillator fell to negative 0.40 this week and has drifted into the lower half of the neutral range. This oscillator spent two days in overbought territory October 25 and 26; but to confirm new highs in the market it should have remained in overbought range for a minimum of five trading days. The last time this indicator did this and confirmed new highs in equities was between February 4 and February 10 of this year. What this means is that the new highs seen in the market since February were driven by less and less buying pressure. The fact that the oscillator is currently below the zero line means there has been more volume in declining stocks than in advancing stocks over the last 25 trading sessions. It is not a sign of underlying strength. See page 8.
The 10-day average of daily new highs dipped from 335 to 202 this week and on November 23, the new high list was less than 100. Meanwhile, the 10-day average of daily new lows rose to 132 this week from 85 last week. A 10-day average of 100 defines the market’s trend; therefore, the current combination of 202 new highs and 132 new lows is mixed. This indicator is downgraded from positive to neutral. The NYSE advance/decline line made a confirming record high on November 8 and has not confirmed the more recent highs seen in the S&P 500 and Nasdaq Composite. Volume has been declining and below the 10-day average for most sessions in November, but it was 25% above average on the down day of November 22. Bull markets should have volume rising on up days and falling on down days. Therefore, recent volume patterns are a bit of a concern. Still, the shortened Thanksgiving Day week has a long history of light trading volume and high price volatility and has not had any predictive value. Therefore, even though Wednesday is a heavy economic release day, we would not worry too much about price action this week. We expect many investors are finally traveling to see family after more than a year of restrictions. The action of the post-holiday week will be more important.
Gail Dudack
PLEASE NOTE: Unless otherwise stated, the firm and any affiliated person or entity 1) either does not own any, or owns less than 1%, of the outstanding shares of any public company mentioned, 2) does not receive, and has not within the past 12 months received, investment banking compensation or other compensation from any public company mentioned, and 3) does not expect within the next three months to receive investment banking compensation or other compensation from any public company mentioned. The firm does not currently make markets in any public securities.
