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A Tale of Two Energy Tapes

Crude oil has rallied smartly over the last five days.  As a proxy, the iPath Crude etf, OIL, is up ~11% in that period.  There is a view that oil could have meaningful upside as the re-flation trade continues to play out, especially with a weakening dollar.  We manifest our global macro calls in our etf portfolio, but for those who cannot play etfs, or the commodities directly, we want to highlight an important data point as it relates to the energy sector.  Specifically, in a rising oil and natural gas environment the largest capitalization companies may be laggards.

 

We saw this in spades over the last five days.  As outlined in the chart below, the etf OIL was up 10.9% and the Energy SP500 etf, XLE, was up 8.8% in this time period.  Within the XLE, there was a major bifurcation between the two largest companies and the eight next largest companies.

 

The two largest companies in the XLE are Exxon Mobil (XOM) and Chevron (COP).  Together these two companies comprise 37% of the XLE.  Over the past five days, these two stocks were up 2.6% and 2.8% respectively, dramatically underperforming both oil and the XLE.  The next eight largest companies comprise 28.3% and over that same period were up 11.2% on average and outperformed both the XLE and the commodities.

 

While the next eight largest companies are a mix of oil, natural gas, and services (Schlumberger), this is a dynamic that will likely continue.  The largest oil companies, such XOM and COP, while cheap with healthy cash flows, have a very difficult time adding reserves that will enable them to grow their production at a high rate.  Thus, in a rising oil environment, when scarcity of oil begins to get priced into the equities, the super capitalization companies could dramatically underperform, as they have in the last five days.

 

Daryl G. Jones

Managing Director

 

A Tale of Two Energy Tapes - crude


BOOMERANG

 

Research Edge Position: Long Australian Equities via EWA

 

Australian employment data released today surprised most observers by swinging 30 basis points to the positive for April.   The market response was a rally across equities and a selloff in treasuries as investors digested the news and factored rebounding external demand and lessened rate cut prospects into their models.

 

 BOOMERANG - aust1

 

We have been vocal fans of Australia's markets and economy as well as the steady handed work of Reserve Bank Governor Glenn Stevens and his predecessor Ian Macfarlane.  Declining demand for commodities and financial services have been the primary drag on the economy down under, but the impact of China' stimulus on the base metal and coal markets has been pronounced in recent months and the Australian financial sector post 08 was left significantly less weakened overall than its counterparts in the US and Europe.  

 

We posted yesterday on Chinese demand for base metals and Iron in particular. As we noted then, the competitive landscape for Australian and Brazilian iron ore producers does not appear to have impacted by currency divergence YTD (see below) . The Australian dollar rallied today versus the USD on today's news however, and we will continue to watch for clues from the FX and shipping rate markets for any signs of divergence between the two nations as they vie for the Client's attention.  

 

 BOOMERANG - aust2

 

Currently the biggest potential negative external driver for Australian equities we are watching for is weakness in commodity demand rather than competition.  Base metal prices (copper in particular) have had a phenomenal run and could easily correct without breaking overall trend.  This could be particularly pronounced if the Chinese State Reserve bureau sends signals that it's near term demand has been satiated or if there is a near term pull back in reported import data as the initial rush of unleashed credit abates. Any perceived weakness in metals could spur a pull back; as the reflation puzzle pieces fall into place the name of the game will be staying one step ahead of consensus.

 

We continue to be long the Australian equity market via the EWA ETF and today's employment data only contributes to our conviction in the position. Currently we would only expect to sell our position near term based on price action or external drivers. As always we will change as the data does.

 

Andrew Barber

Director


IL APPROACHING A POSITIVE 1ST DERIVATIVE

Illinois reported a better than expected 1% drop in same store revenues for the month of April.  We've been focused on deltas and the 2nd derivative delta turned positive in January (see the chart below) and has trended positive ever since.  Illinois is getting close to yet another pivot:  an actual positive first derivative.  In other words, same store revenues could turn positive.

 

Not surprisingly, PENN's Hollywood casino led the way, up 9%, since its sister property, The Empress, was out of commission due to a fire.  BYD's East Peoria property also performed well, up 3%.

 

IL now joins the ranks of Louisiana, Missouri, Iowa, and Colorado as states that may begin to show actual revenue growth.

 

IL APPROACHING A POSITIVE 1ST DERIVATIVE - IL April delta chart


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The Conch Has Been Claimed

"Head-fake" ... "Swine"... Whine...

 

When it comes to making the call on US employment deltas, Les Depressionistas can't fight gravity. The chart below is what it is at this point and is, like all charts, a historical review of what's behind us. Market's don't trade on the past. They look forward. Now you know why we went straight up.

 

This week's jobless claims report provided the shock and awe required for that last brave soul standing to cover his shorts into the apex of the steepest short squeeze in modern history.

 

In the end, US employment improving should stabilize the US Dollar. This morning the economic data arrested the decline of the US Dollar and that, in turn, arrested the ascent of the stock market's squeeze.

 

Bernanke just walked America through what happens to interest rates as the economy finds her cyclical recovery - they go up. As they go up, this is one more factor that should allow us to start making some money on the short side again. With plenty of short covering out of the way, there are some fantastic entry points developing.

 

Our call has been to be long for the rollover in this chart. Now my call is to ring the register, take a deep breath, and wait to see where Mr. Market takes us next. All the while, remember that market prices don't lie; people do.

 

Keith R. McCullough
Chief Executive Officer

The Conch Has Been Claimed - employment1


LVS: DON’T EXPECT A NEAR TERM ASSET SALE

Investors anticipating a near term catalyst of an asset sale announcement may have to wait a little longer.  Our reconnaissance suggests that LVS may not be very far along in terms of selling the mall(s) or the Sands.  Furthermore, the company is probably not close to implementing a plan to avoid breaching the maximum leverage covenant on the Macau facility.

 

LVS maintains enough levers to pull to avoid the breach.  The turn in its business, due in part to impressive cost cutting, is encouraging.  Asset sales and a bank rework are still potentially parts of the ultimate solution.  However, investors may need to be a bit more patient on the timing.


TGT: Tough Timing Billy

TGT reports flattish comps -- in-line with expectations.  But more importantly says that tight expense controls and better gross margins (markups better, markdowns fewer) will lead EPS to be "well above First Call estimates".  Credit quality is now coming in line vs. a trend of coming in slightly below plans. 

 

Bad timing for Ackman's townhall meeting on Monday where he's showcasing his director slate.  He's been making lots of noise about how current management has lost control of the business and touch with where the market is heading (i.e. value pricing).  Seems to be in control at the moment, and with higher profits.


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