Here we go again. Voices are calling, saying it’s time to get back into oil. At least this time around, it seems there are fewer Chicken Littles saying that’s a ridiculous notion.
“Something has clearly changed and changed for the better,” says CNBC’s Jim Cramer, who adds that expectations for oil companies are “low — so low, in fact, that they could be beaten.” He’s also been talking to oil executives who think there’s demand for oil in the low $40s.
Oil notched some decent gains yesterday, after supply data showed crude-oil production falling for the first time in eight weeks. “Indeed, it could well be an indication that the slump in drilling activity since the beginning of the year is now starting to be reflected in the hard production data,” say analysts at Commerzbank.
Watch in coming weeks for whether the trend in U.S. oil production really is reversing, they say. And of course, there’s the oversupply issue, which doesn’t seem to be going away.
It’s a tough call, clearly, as WSJ’s MoneyBeat surveyed a bunch of investment banks and came up with end-year WTI forecasts of $52 to $84 a barrel. Bank of America Merrill Lynch this morning predicted “bear market rallies” for commodities in the second quarter as it sees the dollar weakening.
Then there’s Warren Buffett, who backed out of oil stocks in the fourth quarter of last year. But hey, as our call of the day points out, the Sage isn’t always right (gasp).
As for that Good Friday jobs data, BTIG’s Dan Greenhaus says plenty are wondering how the numbers can meet expectations, when everything else is delivering one big fat disappointment after another. “We think the risk is to the downside, but unless it meaningfully misses, we’re inclined to say, ‘so what?’” he said. Here’s more on why it might not matter to markets on Monday.
You could feast your eyes on earnings instead, with Alcoa set to get the party started next week. If profits are set to fall, will it hurt stocks? Our Chart of the Day takes a look.
Key Market Gauges
A short week finishes up Thursday, and it’s looking like another down day. Futures on the Dow YMM5, +0.35% and the S&P ESM5, +0.35% are off, though Asia ADOW, +0.98% had an upbeat session. Europe SXXP, -0.31% is tipping south. Crude CLM5, -2.92% is getting dinged this morning as hopes of a deal on the Iran nuke front seems to be a possibility. Gold GCM5, -0.92% is slightly lower, and the dollar USDJPY, +0.03% is pretty steady.
Counting down to nonfarm-payrolls data tomorrow, weekly jobless claims fell 20,000 to 268,000, near a post-recession low. But the trade deficit sank 17% in February. Factory orders is coming at 10 a.m. Eastern. As for the jobs report Friday, here’s what to expect.
Kraft KRFT, -1.28% KRFT, -1.28% KRFT, -1.28% KRFT, -1.28% may be in a bit of hot water, along with Mondelez Global LLC, after the CTFC charged both with rigging the wheat market.
The EU is laying the groundwork for antitrust charges against Google GOOG, -1.14% in a probe that’s been going on for five years, and preparing to make its move in the next few weeks, according to The Wall Street Journal.
The Feds have been looking at Bill Ackman’s report on Herbalife HLF, +0.75% as they probe potential manipulation of shares, says The WSJ.
Late last year, Warren Buffett’s Berkshire Hathaway BRK.A, +0.13% BRK.B, +0.22% sold nearly $4 billion of shares in Exxon Mobil XOM, +0.00% bailed on ConocoPhillips COP, -0.06% and cut a stake in an oil-and-gas drilling-equipment maker. That was as oil prices were collapsing fast and furious.
Everyone knows about Buffett’s amazing investment record, but on certain calls, such as oil, he’s not exactly solid, argues John Manfreda for Oilprice.com. ConocoPhillips is one call that cost him several billion dollars, though others, such as on Petro China PTR, +0.38% have worked out better.
“To achieve success in this sector, you have to buy oil and gas stocks when they are out of favor and the price of oil or gas is at a multiyear low,” says Manfreda. With ConocoPhilips, it was a matter of timing, as buying in 2009 and not 2008 would have put Buffett in the money.
Buffett also has plenty of criteria for investing, and some of it just doesn’t fit well with the oil industry, such as wanting companies with high margins and a low amount of debt.
“Buffet’s successes in the resource sector demonstrate that you should buy when prices are low, the sector is out of favor, company cash flows are still stable, and companies are selling for less than its book value,” said Manfreda. Read the whole column here.
Can stocks rise when profits are falling? That’s the question posed by Urban Carmel as earnings season revs up and with a fairly underwhelming quarter under our belts so far. Sales are seen as falling and already-high margins may struggle to expand further, making it tough for profits.
As the chart below shows, the last three big bear markets over the past 35 years correspond with periods of falling corporate profits (shaded green). Stock weakness over the past four months has led some to worry this bull market is winding down, notes Carmel, writing on the Fat Pitch blog.
That, of course, is just one possibility. This second chart shows that in the same 35-year period, falling profits have more often corresponded with periods of the market pausing or even continuing higher (shaded yellow).
“In other words, it’s not that unusual for profits to stop growing during a bull market. The declines in profits in the mid-1980s and early 1990s were pretty severe, yet stocks continued higher for as long as another one to two years before a noticeable correction occurred,” says Carmel.
But a bigger problem for equities is valuations. “At a minimum, high valuations combined with slow sales and profit growth most likely imply limited upside to equities until either growth is restored or valuation premiums decline,” says Carmel.
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