August 19, 2006
Best and Worst One Week Relative Performance
You can see from the scan of my liquid ETF universe that money flowed mainly into tech last week. Folks have become confident that the Fed is done, so rotation into the beaten down was the theme last week. Risk taking is back in style.
None my beloved areas saw much love: Energies, Utilities, Staples, etc.
Cat: | Time: 11:03 am (utc+8)
August 20th, 2006 at 10:47 am
Every time I see the Oil Service sector rise up and down with the price of crude, I keep wondering if I’m the idiot or the rest of the world is.
No that’s not a serious question, but an opening to point out that any reasonable multiple of the price of crude over what it used to be in recent memory means that Oil corps like Exxon and ConnocoPhillips have obscene amounts of cash they have to throw at the Oil Service sector if only to say they’re doing something about adding more reserves.
Or in other words, once past a certain point, the price of crude and the OIH really should logically de-couple. Right around now is good, but if I’m the idiot, please enlighten me. . .
August 20th, 2006 at 1:02 pm
jpmist: I don’t know much about the oil services sector, but it does make sense that the majors and smaller E&P guys need to get more oil out of the ground which involves buying from the OIH companies — worldwide demand for rigs ain’t going down.
Everything hinges on the persistence of high oil and gas prices though … I don’t get your point about the “de-coupling” — are you saying that the OIH will lead Crude, i.e. we will see (are seeing?) the OIH peak before Crude does?
August 21st, 2006 at 11:03 pm
Check out a three year chart of OIH relative to $WTIC and you’ll see we’re at the same ratio now as three years ago. That doesn’t make any sense to me.
Even if crude drops to $50/barrel, rig leases will still be higher than they were three years ago and supply more constrained. Plus there’s the bonus of replacing aging pipeline infrastructure such as Prudhoe Bay. . .
My point is simply that there is a crude price threshold beyond which OIH and crude should stop moving in tandem simply because there are only so many rigs being leased and that it’s doubtful that supply will meet demand for several years.
I’m aware OIH is a cyclical industry, but it seems that traders are already pricing for the cyclical decline in profits before seeing just how high those profits will go.
August 22nd, 2006 at 12:42 am
I agree it seems as though OIH should be at an all time high b/c of the excess cash on hand and the need to expand oil drilling.
I guess this is what we call a “market inefficiency” and a chance to make money. The market doesnt always move in a logical pattern in the short term, but usuallly equals out if you expand the time line.
I would guess that the association w/ commodity prices makes the money flow out of the sector just b/c people think the balloon has to much air already and they don’t want to hang around to see it pop.
The question is, how long do you want to wait? I’m sure you’ll make money if you don’t mind waiting 3-5 years, I want to know whats going up today.
August 22nd, 2006 at 8:27 am
jpmist: Well, the OIH stocks have run so far these last several years that the 3-5 year outlook for the stock prices, even assuming persistently high oil and gas prices, isn’t that great (except for maybe SLB). I’m keeping an eye on the trend following system to see when it exits the OIH and will let you know.
DT: Yes, now’s not the time to get excited about Oil Services … several years ago when they were out of favor and no one imagined the level of sustained profitability that they’re now enjoying — that was the time to buy.
August 24th, 2006 at 8:33 am
A small bit of welcome affirmation from the today’s WSJ “Heard On the Street” column. . .
“The energy industry recently has emerged from an extended period of underinvestment. Major companies are starting a slew of infrastructure projects: refineries, liquefied-natural-gas plants, offshore-drilling platforms and other expensive undertakings.
. . .
Project backlogs are growing even faster at companies with greater reliance on energy clients. Last quarter, excluding certain costs and fees, Foster Wheeler reported a $2.84 billion backlog, up 83% from a year earlier, while McDermott International, based in Houston, reported a $7.8 billion backlog, more than double from the start of the year.
While this glut of new projects seems like a spree, the assumptions behind the buildup are relatively conservative, says John Rogers, an analyst with D.A. Davidson & Co. who covers engineering and construction firms. He said most projects he has discussed with clients and vendors assume oil prices of about $40 a barrel — more than 40% below current prices.”
. . .
That said, bulls believe these firms might be one of the few pockets of growth in a slowing economy, even if oil prices slip.
“Once they start these big projects, they usually don’t shut them off,” says Mr. Han of Transamerica. “A half-built refinery isn’t much good to anyone.” ”
Both Foster Wheeler and McDermott are in PXJ
August 24th, 2006 at 10:03 am
jpmist: When something makes the “Heard on the Street” column, the market has discounted the “news” months ago. This is why one clever wag (me) calls that column “Heard Months Ago on the Street.”