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How Much Longer Can Money Managers Hang in Behind Energy?

by: Bill Cara September 01, 2008 | about stocks: XLE / XLF    

Bill Cara

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In markets today, there is a subtle shift of capital flows going on that I have observed, and which bears watching. As the economies of Japan and Europe are now showing the weakness that I was writing about for months as the untold story, the US Dollar has strengthened along with the US equity market. This does not mean a new Bull market for stocks has started, however.

The fact is that the growth rate of the global economy is rapidly slowing, with large pockets of recession, and the rate of producer and consumer inflation is far higher than the comfort level of any respectable central banker. The major financial services companies (banks, broker-dealers, insurance companies) have yet to write down their so-called asset backed commercial paper holdings to market values, which is the reason these companies are illiquid and have limited funds to lend to producers and consumers. This credit crunch leads to a quandary for capital managers, producers and consumers alike. Where capital has been flowing has nothing to do with Bull markets or bullishness and everything to do with a desperate attempt to find safe havens.

Some capital managers are in denial; others are cranking out their excuses because they fear that the Other People whose Money they have been managing improperly are about to become an ugly crowd of litigants.

After the Financials (XLF) peaked on October 5, 2007 at 35.97, before plunging -53.4% to 16.77 on July 15, there were carefully crafted stories of oil shortages, refinery shortages, and the like, which served to move that capital from XLF to the energy sector (XLE). XLE then moved from a low of 62.97 on Jan 23 to a high of 91.42 on May 21. That move kept the major equity market indexes from outright collapse, even though the DJIA index did manage to fall -23.7% from a high of 14198 set on October 11 to a low of 10828 on July 15. The total capital transferred from Financials to Energy was in the mega trillions.

But, today, after a rally of +27.3% in the Financials from 16.77 (July 15) to 21.35, traders understand that the credit markets are still in a major crisis with extreme spreads getting worse, and more banks are failing every week. So they are not chasing the Financials higher, in fact the XLF peaked between late July and early August. That dinner’s been eaten.

Moreover, following the highs in XLE from May 21 through into July, traders now recognize that growth in the global economies cannot sustain crude oil prices in the 120-145 range, and so are knocking the price down, likely into the 80 range this Q4 and 1H09. So XLE dropped from a high of 90.16 on July 2 to a low of 68.35 on August 18. That was a drop of -24.2% in six weeks in the industry with the world’s largest market value, which shows the power of these money flows. Now, just two weeks later, possibly because of fighting between the Russians and Georgians and possibly because of a major threat of Hurricane Gustav to the US oil fields in the Gulf of Mexico, the XLE has recovered +9.2%.

How much longer can money managers hang in behind XLE, knowing that the global economy is in dire straits, the credit crunch cannot be terminated until the Financials complete their write-offs and restructure/raise more capital, and the political direction of America is decided following the removal of eight years of Texas oil people in the White House?

In that regard, I think the choice of oil lobbyist, gun-toting, right-to-lifer Alaska Gov. Palin for running mate on the Republican ticket is a clear indication of the GOP stance with respect to their biggest political supporters. That’s not to say I disagree with those positions, although I am surprised with the choice of a political unknown. America has this thing about the star system. I’m sure if Hollywood can make stars of people like Paris Hilton, Gov. Palin ought to be an easy Manolo Blahnik fitting.

Not to make jokes, but if they have already started from the likes of The Daily show and CNN’s lead news anchor Wolf Blitzer nonetheless, this is going to be a tough convention and campaign for the GOP.

Blitzer, soon after reporting that Palin had been chosen as the McCain running mate, was informed by the reporter who broke the story that his digging into her barely known past revealed that Gov. Palin had been an athlete on the high school volleyball team, where she had been known as ‘Sarah the Barracuda’. Said Wolf, in response, “Our little Sarah was quite the high schooler”.

I think she’s being portrayed as Rodney Dangerfield by media leaders who are serious about the problems of the country and the steps being taken to turn around the situation. I’d like to say that I find it a bit unfair; but really is it? Texas Senator Kay Bailey Hutchison, one of the most prominent Republican women in the nation, was startled at the announcement, while being interviewed at the time on CNN, and admitted she didn’t know Gov. Palin. Many of the CNN long-time reporters also said the same.

So, back to the market. Where are we, if, as I say, the Financial and Energy stocks, which are by far the two biggest industry sectors in the equity market, are going nowhere? (I won’t even argue here that they are going south, although I could, but I just need to figure out what money managers are doing now and let the market move where it wants.)

After Energy and Finance, is capital flowing into Tech (XLK) maybe, since that’s the next biggest sector? No, not there either. In the past three months, XLK has dropped -9.7% and the Semi-conductor group (my leading indicator for Tech) is down -12.8% in that time, and -6.3% in the past two weeks alone, while the S&P 500 is down just -1.1%.

Yes, where is the capital flowing? I say it’s going into safe haven places like US Treasuries. The TLT is up +2.5% in the past four weeks, despite inflation data that is rocking and rolling.

Another pocket, although it may turn out to be full of holes, has been the small cap stocks. For instance, the Russell 2000 index rallied from a July 15 level at 673.76 to a high of 764.38 on August 15, which was a one-month gain of almost +13.5%, and the current price is still at 739.50.

Driving T-Bill yields down well below short-term rates is not an effective long-term strategy for bullish traders. Some say, it’s nothing more than a panic move. But, really, where else are traders – particularly the ones who absolutely must pursue a long only strategy -- supposed to do?

Doesn’t this situation go to show that the mutual fund model no longer works? There are times that traders cannot afford to be 100% long, even with large cash positions.

After the close Thursday, up +213 points in the DJIA index and +329 points over three straight days of gains, I opined early Friday that my 10000/2000 opinion (it’s not a forecast; it’s a guess) was still in place. The DJIA on Friday sold down -172 points, most of it in the late afternoon. Traders have not started a Bull market; they are not even bullish. They are scared.

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This article has 19 comments:

  •  
    Sep 01 09:31 AM
    "I think she’s being portrayed as Rodney Dangerfield by media leaders who are serious about the problems of the country and the steps being taken to turn around the situation."

    Your article was interesting up to this point. It seems to me that "serious media leaders" would research Palin's credentials and portray her based on those findings. By the way there are two Rodney Dangerfields, the actor and the businessman.
    Reply
  •  
    Sep 01 09:58 AM
    A "Keen" comment indeed. I think the new vp nominee is going to surprise many people.
    Reply
  •  
    Sep 01 10:08 AM
    I stopped reading your article after your liberal bias view came out. Anyone who takes the word of CNN has no credibility.
    Reply
  •  
    Sep 01 10:34 AM
    so, Bill, in essecne you look at the money flows to decide what investment to make? Or so I oversimplify? Because if you do, then you are no better than any other momentum chaser. You see, i don't care if the price of oil goes to 80, 90, 100 or 130 because at any of these prices many of the oil and gas companies are very profitable and would deserve much higher stock prices. I couldn't care less whether the hedge funds and momentum chasers and quants recognbize this a weel a quarter or a year from now. If COP continues its stock buybacks at current rates even assuming slightly declining profits and cash flows over the coming years, then I will be their only shareholder 10-15 years from now. go figure, what for do I need hedge funds, money managers and money flows?
    Reply
  •  
    Sep 01 11:16 AM
    If you are going to write an article as though you know something, you might want to research the subject a little more. You have several obvious mistakes about Governor Palin's history that clearly indicate you do not know what you are writing about. For example, she led her high school basketball team to a state championship -- not volleyball. She is hardly a star of "big oil" -- she passed an oil windfall tax in Alaska and went after the ethics of the oil industry. Just because she is for domestic drilling does not mean that Governor Palin is all about big oil. If you stop and think for a minute, the oil industry makes the most money when there is a shortage. Shortages result in $140 oil which results in big profits. Opening more drilling pushes oil prices, and subequently oil profits, down. Even repeating the "quite the high schooler" comment is considerably condescending. The fact that Governor Palin is pro-2nd amendment and pro-life isn't exactly surprising, being that they are part of the Republican platform. Why would Republicans want to nominate people who are opposite their platform just to win? And finally, your comment "not to say I disagree with those positions" is a weak attempt to stand above the issues as an independent or possibly even a Republican and is shameful. If you are going to be a Democrat, be honest and admit it. There is nothing wrong with being a Democrat, but being a deceitful reporter cannot be trusted.
    Reply
  •  
    Sep 01 11:21 AM
    Get focused Bill and stay away from politics. You aren't witty and will only alienate 43% of what few readers you have left. Momentum money shorted the financials and the dollar into July, then shorted energy and other commodities and is still maintaining a large short position in the broad market. Short is a position. This morning the shorts with overseas accounts are piling into oil and natgas. The short position in natgas is huge. Capital is flowing into bets against all kinds of stocks and commodities and you have completely missed the move. Who cares what the managers of long only funds are doing? They do not control the direction of the markets in the short or even intermediate term and you said yourself that you are only daytrading now.

    From your Aug 25th article. . . .
    "The market is incomprehensible to some of us at the best of times, but these days it’s fair to say that most of us don’t get it. All we can do is day trade while we await the market’s revolution, whatever form that may take."

    That is a very illuminating paragraph.
    Reply
  •  
    Sep 01 11:28 AM
    From what I am hearing/seeing, the long term, smart money is moving to China (as a sector) since they are one of the few countries with tons of cash in the bank to stimulate their economy and they can turn the factory lights back on since the Olympics are over (they closed a bunch of factories due to smog).

    Regarding Palin, she is strongly in support of the conservative agenda, whether you like that or not, but an extreme lightweight on foreign policy, and has no national experience.
    Reply
  •  
    Sep 01 12:43 PM
    Informative article on the xlf. VP Palin is a sharp person who should be given a fair chance by the media... How ever they seem to want the Chosen One to have a cake walk into the Oval Office. We saw what they did to to Ms Clinton in the medias one side coverage. Hope the American wake up and demand a more fair coverage of who ever is running.
    Reply
  •  
    Sep 01 01:07 PM
    Zagman: FOX is your Bible, right? Nothin' but the truth . . . As for the article: fewer words, more wisdom. Seeking Alpha's standards lowered with this article.
    Reply
  •  
    Sep 01 01:11 PM
    PS: Palin not worth any comment. Palin + McCanin = 0 + 0. Stay off the politics. Not your cup of tea.
    Reply
  •  
    Sep 01 01:57 PM
    I am amused by John Podesta's pathetic attempt to bad mouth Sarah Palin's alleged lack of administrative experience. She served as a city commissioner and mayor of a small town. She has served as governor of Alaska for 20 months. Compare that with the "administrative&q... experience of OBAMA! and Biden. They have never met a payroll or set up a budget. I submit that the "experience" of OBAMA! and Biden wouldn't qualify them to operate a pay toilet.
    Reply
  •  
    Sep 01 02:25 PM
    On some subjects there is a legitimate convergence of economics and politics, but this is a lightweight assessment of both, with no real reason for combining the two. I agree that the article is below the standards of SA.
    Reply
  •  
    Sep 01 07:39 PM
    Even with 50-60 dollar oil, COP and XOM are printing money.
    Reply
  •  
    Sep 01 09:28 PM
    still trying to figure out who was the mother of the baby with Downs syndrome... palin or her 17 year old daughter (who's supposedly now pregnant with an illegitimate child)?

    and i understand palin is getting sued for influencing the firing of a guy who wouldn't fire a cop who divorced her sister, the same cop who tasered his kid (palin's nephew) a couple of times?

    who says she isn't ready to be a heartbeat away, she seems to fit right into the 21st century republican mold... i suppose next we'll find out the entire republican side of the state legislature is gay?

    too funny...


    Reply
  •  
    Sep 01 11:49 PM
    Are you kidding me??? How can anyone take Sarah Golitghtly seriously? After months of telling us he will pick a VP most qualified to take his place (he is 72 with a history of cancer) McCain picks the mayor of a town of less than 9000 population and the governor of the Great State of Alaska!!!! This is like a Disney movie. Then to add stupidity upon stupdity, the sheep like Republican herd makes comments like "she is from Alaska which is the closest state to Russia so she understands them". Makes you want to kinda puke doesn't it?
    Reply
  •  
    Sep 01 11:59 PM
    PS Jimbo, are you sure you are not Dumbo? Are you comparing the qualities of this cheerleader from the frozen north to the head of the Harvard Law Review???. God save America from idiots like you.
    Reply
  •  
    Sep 02 12:10 AM
    The author paper is pathetic. He tells us that he has no clue of what is going on. Consequently, the best thing to do is to be a day-trader.

    As for market and US economy, things are the same: the FED/Treasury/Congress continue printing money and manipulate financial markets.

    US political leadership, regardless of party affiliation, is a total national disgrace.

    Just look at "achievements&quo... of the Bush administration:
    - US economy is about to go in a depression following the coming presidential elections
    - 8 years ago, the USA was a super-power capable of invading other counties at-will with a total disregard for international laws and treaties. Russia and China were saying: Yes Sir to Mr. Bush.
    But not any more.

    When at the American order Georgia invaded a Russian protectorate state, Bush expected that Russia would swallow his POS. It did not work this way: Russia destroyed Georgia and permanently annexed its territories. When Bush and his European allied protested, Putin reminded them about his 7,000 nuclear warheads and his desire to use them.

    China is observing...At present moment, it is "neutral". But China has its own national interests that are in a direct confrontation with American interests.

    At any moment a new version of the Cuban crisis might happen. John Kennedy was able to handle it savings millions of American lives.

    Just imagine Sarah Palins as a president and a commander-in-chief:
    - Do you think Sarah Palins can handle this kind of an international crisis or any crisis at all?
    - Do you think she is capable of developing and skillfully implementing American strategic interests without exposing the USA and its people to a grave danger?
    Reply
  •  
    Sep 02 12:24 AM
    Liberalism is a mental disorder! This country is in trouble, and a demikin is never the answer.
    Reply
  •  
    Sep 02 01:16 AM
    too bad the analysis here was intermixed with political crap. get a life people, the negatives of both candidates drastically outnumber the strengths. you are only arguing which type of death you prefer - but we are pretty much screwed either way.
    Reply
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