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Oil and Yields Crushed and There Is Still More Pain To Come
MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN SHARES OF mO
© 2018 Mott Capital Management, LLC. Use, publication or reproduction in any media prohibited without the permission of the copyright holder.
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Looks can sometimes be deceiving, the S&P 500 was down about 25 bps on the day, but make no mistake, it was energy and oil-driven. Oil fell by about 4.5 percent, closing at $67.50, from a high of about $73 on May 22. So, what happens now? Oil probably heads towards $65, and perhaps $61. That is good news though! You know why, because falling oil prices are deflationary, and like I have been writing and trying so hard to tell everyone is that when oil prices stop rising, so too does the Fed’s inflation problem.
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The amazing thing, when I predicted oil would rise to about $75 it was December 18 and oil wasn’t even $60; it was only $57.20! Wow. Good job on my part. Anyway, in that same piece, I predicted 3 percent yields too, when the 10-year was only 2.39%. Some of the other predictions didn’t work out quite so well, but hey I never thought I’d get them all right.
Dollar
The dollar is breaking out in a big way, and should the index rise over 95; I think it is off to the races. Suddenly the dollar is rising for reasons other than rates, but because Europe’s economy seems to be slowing a bit, and Italy is trying to form a government which may or may not threaten the Euro. The PMI in the eurozone is rolling over some too, perhaps a sign the economy is now slowing. Draghi may not be able to roll back QE after all, is Europe the new Japan?
Eurozone PMI
So, we will continue to wait, and see which way the dollar goes, the next few days, will be very telling.
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Spreads
Another thing to consider is the spread between US 10-year yields and German 10-year yields are at levels not seen since the 1980’s!
So, it tells us a couple of things, one that a reversion to the mean, seems reasonably likely at some point, and unless the spread is going to blow out to levels not seen since the high inflation days of the 1970’s, it seems unlikely that this current pace can continue.
German yields have fallen sharply since May 18, from 65 bps to 40 bps in just a week, 25 bps! We talk about our 10-year yields moving five bps, like it some big deal. At some point, all the European bond buyers are going to come and buy more of our treasuries, and that will drive the dollar up, and our yields down. Remember, an international bond buyer must purchase dollars and sell euros to buy US bonds. It is just that simple. The global market will force the Fed’s hand into not being as aggressive as they want. They can keep jacking up the front end of the curve, but they risk inversion.
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Global Market
We live in a global market, we cannot avoid that, the US is not an island unto itself. A stronger dollar shall kill off what inflation we have, driving rates lower, and that will be a positive for equity prices.
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Impact on Stocks
Falling yields are good for the utility and consumer staples. The staples have been crushed, with the XLP ETF down 15 percent from its highs. Massive losses in stocks like Altria, Coke, Pepsi, Clorox, P&G. All Crushed.
I know I’m living on the edge and going against all the masters of the universe. But ask yourself, where were all the rocket scientists who are now calling for $80 oil, higher rates, and higher inflation back in December? That’s right, nowhere to be found.
-Mike
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© 2018 Mott Capital Management, LLC. Use, publication or reproduction in any media prohibited without the permission of the copyright holder.
Tags: #sp500 #oil #dollar #yields #inflation
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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