Thursday, October 1, 2015

Another Quarter, Another Lost Dollar

Markets open October with the reports on benchmarks coming from every direction as the third quarter comes to a close. Economies and companies will be informing investors on their performance over the next few weeks through indices describing industrial performance and corporate earnings. Predicting bearish numbers, traders opened the October market with a loss on Wednesday which produced a lot of concerns over what may be looming over the economic landscape. The Fed will be especially attentive to numbers in the labor market as they decide whether to raise rates by 2016 or keep the fed funds rate between the low range of 0.00%-0.25%. The Dow Jones Industrial Average opened with an initial gain but dropped immediately after to -0.41% with potential intraday losses lurking as the day continues. The Dow saw a bounce off the traditional Bollinger Band as prices converge towards the 20-day average (or Bollinger Middle Line). Variation is contracting as a consolidation phase might give investors more to look for in a future robust move. The S&P large cap index shows a similar loss of 0.37% after bouncing off the 1,900 level yesterday. SPX also shows a small bounce off the Bollinger Bottom as it strives to reduce volatility in the near future while possibly reverting to a consolidation phase. Consolidation and continuation are the key words for me as the economy chugs along slowly with the technical and fundamental indication of something worse to come. Being cited as one of the most influential benchmarks today, the Institute of Supply Management reported a drop of 0.9 points from 51.1% to 50.3% in September which is the weakest reading since May 2013. The new orders and employment index also fell as confidence in the economy falls with a stronger dollar hampering the ability to increase exports. Businesses should be wary in expanding expenditures as lower demand outlook has corporate debt interest rates increasing their spread as credit gets more expensive. At the same time, treasury yields continue to drop on a psychological desire for safety. Around the world, central banks are contemplating the need for increased liquidity in the markets, but most like the Bank of Japan are holding back until (or if) signals of weakness intensify. As we turn to the energy sector, the first thing to notice is some intraday volatility around WTI price. After an initial climb today, traders sold enough to push the price down -0.22% from a high that was $2.11 higher. A lot of speculation surrounding Hurrican Joaquin and the weak manufacturing accounted for the meager losses on the day. After Chinese manufacturing data for the third quarter came out today as well, investors saw a positive demand statistic as the drop in manufacturing and new order indices bottomed out last month with hopes of gaining in the last quarter. At the same time, the dollar fell against the Euro today when the weaker manufacturing numbers were introduced. Nevertheless, Glencore's price continue to go down as commodity weakness overwhelmed its credit rating. Chesapeake Energy set to cut 15% of its workforce lost a significant bit from their price yesterday. All this caused by the 24% cumulative drop in WTI crude oil for the third quarter. Oil and gas integrated services also felt the pain of a plunging natural gas price that suffered losses of almost 10% for Q3.




As a result, corporate earnings and manufacturing businesses which are used to factoring in higher fuel costs have experienced rising deflationary pressures as well. Although, we'll find that oil poses more threats to corporate models compared to the consumer positives that is has enabled. Transportation industries such as the automobile and airline companies should see a sizable gain in revenue if not a similar drop in operation costs. Today, investors were introduced to the impressive performance of auto sales from FIAT-Chrysler, Ford, and GM, all corporations that were bailed out in the last Great Recession. I'm definitely bullish on stocks like Delta, American Airlines, and other air travel related companies. What may give a gain even more girth after an earnings report is the small, petty losses caused by concern for Hurricane Joaquin's possible landing in New England. It's been hard to focus on these positives of low oil prices when clamor over low inflation and abysmal energy performance stays in the spotlight, but Q3 earnings should be helpful in demonstrating its benefits. Fundamental predictions for the energy sector looks a little more dim, but their performance over the third quarter was not as disappointing as its commidity counterpart.

Okay, well maybe it wasn't that great. A lot of large cap energy stocks felt not only the pain of low oil prices, but an overall sagging energy market. Exxon-Mobil and Total managed to pare their losses below 10% for the quarter using their established infrastructure and diversified assets to assure their security. Neither of these companies, along with most other large cap energy blue chips, weren't hurt as much by the increase in borrowing, hence, why most of these tickers dropped less than the S&P Energy Index 18%. The black bar representing Oil and Gas Integrated Services showed a drop lower than 18% representing most of the large cap stocks in the oil and gas industry as a whole. Chevron and BP performed noticably worse than its competitor in Exxon with capital complications. BP's poor performance could also be attributed to continuing backlash from the Deepwater Horizon oil spill. Petrochina's demise was obviously the cause of Chinese weakness that defined this economic quarter's downtrend. Petrobras Brasiliero might also have been shown to experience the same type of losses in Q3. Both of these integrated services will see bearish times as borrowing in their home currency may be significantly harder with a strong dollar. Furthermore, their respective country's demand was lowered and continues to be lowered as emerging markets losses remain injurious indefinitely. In Q3 alone, investors pulled around $40 billion from developing countries' stock markets in an attempt to find more safety. Petrochina's 36.35% loss characterizes the previous quarter's price dynamics as well as the global slowdown reaching every corner of the earth with currency devaluations against the dollar depressing commodities. Projections for the last quarter? The energy sector should end the year with less losses than Q3, but overall, I see costly borrowing and more depressed prices keeping bearish sentiment atop any rebounds in the energy sector. WTI and Brent crude oil prices will be affected by the continuation of demand slowdown and sluggish supply decreases. Perhaps with reactions to the overall equities market, benchmark crude prices maintain lateral movement through the end of the year. As far as interest rates go, volatility and important economic indiactors, like jobs reports and GDP estimates, need to behave properly before the Fed can even consider tightening the money situation. For investors, Q4 is all about the stars aligning in the period before the next big market move that will happen before the year ends.


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