S&P500 dropping to 600 by spring 07

[lewman]

Powayseller, I noted you mentioned oil stocks. Are you attracted to oil stocks because of their low P/Es or is it because you think oil price will continue to rise or stay near these levels despite your conviction that recession is around the corner ?

Lately oil’s been coming down hard and fast. Some attributes that to the loss of war premium. I’m not sure because the world, or specifically middle east, doesn’t seem to be a safer place than it was just a few weeks or months ago. Rather, is it possible that oil traders are pushing oil prices down because they anticipate an economic downturn ?

And since oil prices is the main driver behind oil stocks. Would oil stocks still do well in absolute terms if oil prices were to level off ? If it does happen, the only way oil stocks will continue its up trend is a re-rating of the sector, i.e. the market assigning higher PEs to oil companies.

So many questions and so few answers.

Lewis

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

Leung, check out my blog for the recent chart on OIL. It showed the commercials getting short a few weeks back and bingo, a big drop. I do not recall the day I posted it, but it was within the last 2 weeks, it should be in the recent posts listing on the left.

[powayseller]

Chris, why do you think the commercials went short?

leung_lewis, I only bought COP because of Zeals’ recommendation, and I trust their research. I believe oil is in dwindling supply, and the only big source is the oil shale. That is an expensive process, to extract, so it wasn’t done while the price was low. Now that the oil price is high enough, the oil companies will start to extract oil from the oil sands/shale. I believe high oil is here to stay, but the recession can lower the price a little bit. So the days of $50/barrel oil are behind us, IMO, and we are headed to $100/barrel oil, with a few dips along the way, and a big dip from the recession. But don’t forget the largest use of oil is farming, from fertilizer (my husband told me; he read a book about the food supply).

I don’t believe the headlines that claim “Oil down on fewer mideast tension”. I abhor those headlines, bec. the journalist tries to assign a cause, but they have no idea why oil went down. Neither do we. THey should simply write, “Oil down today”. And not guess at a reason. The journalists do this with gold and the dollar and the stock market too. They are guessing, and usually they are actually very wrong. When they say gold is down because the dollar is up, they are wrong, because gold does not follow the dollar, but inflation.

[technovelist]

I don’t think this is correct. Gold is money, and when the main reserve currency (currently the dollar) is in trouble, then gold will go up.

By the way, there is no such thing as a pure inflation hedge. To see this, just consider: We have had continuous monetary inflation for approximately the last 50 years. Thus, a true inflation hedge would have gone up continuously during that time, proportionately to the inflation rate. What investment has done that?

[powayseller]

technovelist, you’ve got me on that one…. I got my info from some studies that Chris Johnston did, and he found gold rises in periods of high inflation. So when inflation is above a certain comfortable number, investors flock to gold pushing up its price.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

PW – I have no idea why the commercials got short OIL, but you do not need to know that, just follow what they do. The price has dropped over $10 per barrel since they went short.

I try to keep it simple and not over analyze things. It gets too hard to pull the trigger when there are too many variables to review, as per my explanation on my site.

[qcomer]

Poway,

While you were 95% cash, investors who were nimble and bought their way in Mid July or when Fed stopped raising rates, have made some killing. An opportunity to realize profits is equivaeltn to loss incurred, for traders and investors. When stocks pulled back in May, you were among first to point out that stocks are leading indciators of the economy and how they are predicting a recession. This recent rally has been going on for almost 50 days now despite all the doomsday economists plike Fleckenstein predicting it wouldn’t last a week or two. Now SP500 is almost back to its May levels. Forget about summer 2007, where do you think SP500 will end after the earning season? All of us are here, not to satisfy our our egos as to who was correct or not, but to make money. Dealing with short term trends is best way to make money in an uncertain or bear market.

So good luck with making/preserving money. Do the way, you think is right but do realize it is not the only way.

[powayseller]

qcomer, S&P500 went from 123 in mid-July to 131 today. Did you predict that would happen? If you did, good job.

Stocks prices are lagging indicators. They fall after company profits fall. I expect the slowdown in consumer spending to lead to lower profits and thus lower stock prices.

Short-term trading is for the pros, so that leaves me out… good luck to you though if can be nimble in that game.

[davelj]

Stock prices are lagging indicators? They fall after company profits fall? Hmmm, that’s news to me.

Actually, stock prices are a leading indicator. They tend to fall in anticipation of falling profits (and vice versa), as the market is forward looking. Although it’s true that they often continue to fall after the realization of such falling profits.

I can’t imagine where you would have read that stock prices were lagging indicators. You’ve got a very bad source there.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

Dave,

We agree here, stock prices are unquestionably leading indicators not lagging. I have been telling clients that recently. They fall on reports when forward guidance is poor due to this relationship. That is not to say that a terrible current earnings report could not tank a stock, but the forward comments are more typically the moving force.

[powayseller]

davelj, It was only AFTER H&R Block announced they lost several million dollars in their Option Arm division, their stock dropped 9%. The profits fell, then the stock dropped. The market is not always so good at being forward looking. Another example is the homebuilders, who only started falling AFTER announcements of slower sales were made.

Perhaps you can give me some examples where the stock price dropped in anticipation of a company’s lower profit. You could use the homebuilders as an example; did they fall BEFORE any downturn in housing was announced, or AFTER?

My source was Joseph Ellis, Goldman Sachs retail analyst, rated #1 for 18 years, whose charts going back to the 1960’s show that earnings are a leading indicator to bear markets. See aheadofthecurve-thebook.com.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

PW – the examples of that are right in front of you. All of the homebuilders have rising 12 month EPS, they have dropped in disounting of a future drop. I have emailed you charts that show this.There might be an exception or two, but most homebuilders and lenders have rising 12 month EPS as we speak. I know you claim their earnings are dropping, but they are not yet on a 12 month basis, which means alot more than just one report.

This is a known fact on wall street, so no sense debating this. The post by the gentleman earlier I think must have been just his opinion, the numbers do not back him. You can always point out exceptions to anything, but the example you state supports our point. They announced slower sales which lead to anticipation of lower earnings that have not been reported yet.

[powayseller]

How can eps rise when the sales are slowing? Share buybacks?

I see that it can work both ways: companies report lower anticipated earnings, making their share price drop IN ADVANCE. Other times, companies report they HAD lower earnings, and the share price drops AFTER the fact (such as Option One).

[lewman]

I believe the market in aggreate (collection of all stock prices) does a fair job of anticipating the future. And just like everything else in life, there are exceptions at the micro / individual stock level as in the case of HR block, and people who do their homework (or insiders) can be a contrarian and benefit from it.

And EPS can certainly rise despite falling sales. You cut cost. How fast the effect can be seen depends partly on the industry. In my industry (fund management) the effect can be quick swift because the biggest contribution to cost is often people-releated … as opposed to capital intensive industries.

[sdduuuude]

Powayseller said “I believe oil is in dwindling supply, and the only big source is the oil shale.”

When the “real” oil shortage (the one where the global supply is truly dwindling and the cost of extraction pushes prices up) happens, you will see the price of oil go up with respect to gold, the supply of which is relatively constant.

This link suggests that political situations and a devaluating dollare are the cause of todays high oil prices, not a shortage in oil.

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