I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back). The monthly “Long Term” update will be on the first Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.
If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.
Economy:
The big deal of last week was the CPI on Wednesday, up 3.3% over last year, and down .1% from last month. The stock market liked it since three previous monthly reports had been higher than expected. Initial jobless claims for the prior week rose to 242K, well above the recent trend. I don’t start regularly reporting this unless it goes over 250K, but that was close. This is the kind of softness that might encourage the Fed into a rate cut. The PPI for May was -.2% which is a good sign for inflation to come down. None of these numbers was noteworthy, but they were all small moves in the direction of supporting a rate cut.
At the Fed meeting on Wednesday, the Fed left Fed Funds rate unchanged, again, up at 5.5%. Powell did indicate that with the data coming in, it was unlikely that the Fed would see the need for a hike of the interest rate and the market seemed to like that. The Fed has a report of where the various Fed governors see interest rates in the future, and the “dot plot” report showed the Fed reducing the number of rate cuts for 2024 from 3 down to 1. You would not think the stock market would like that, but when they look at the data, the traders seem to think if the data continues to come in cool, the Fed might put another rate cut on the table this year.
Earlier this month we saw the ECB cut their interest rate for the beginning of their interest rate cutting cycle. Central banks do not like to bounce around, with a cut then a hike. They like a uniform cycle so they withhold cuts until they are relatively certain that they can deliver a series of cuts. If this happens, one day I can remove “central bank restriction” from my monthly Long Term updates. In the long run, stock markets generally do well in a global interest rate loosening cycle.
Geo-Political:
Let’s talk about oil some more.
A major complication in the oil economy is matching the type of oil that is produced to the type of refinery required to refine the crude. NOT ALL OIL IS THE SAME! There are many kinds of oil, but the primary ones we hear about are light sweet crude and heavy sour crude. A refinery set up for one type cannot refine the other type, without an expensive modification. Here is a good article on the types of oil: https://kimray.com/training/types-crude-oil-heavy-vs-light-sweet-vs-sour-and-tan-count
You may hear people complain that with all of the US production capacity we should not be an importer of oil. That is simply an uninformed opinion. The article below does a good job explaining why this occurs:
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“Crude oil is not a homogenous product. The U.S. continues to import and export crude oil because the viscosity of oil (measured by its API gravity) being light or heavy and its sulfur content being low (sweet) or high (sour) largely determine the processes needed to refine it into fuel and other products. In general, refineries match their processing capabilities with types of crude oils from around the world that enable them to:
- Make the most high-value motor fuels and other petroleum products in a cost-effective manner; and,
- Serve niche product markets for chemicals, petrochemical feedstocks, lubricants, waxes and materials for roads and roofs.
While transportation runs primarily on motor fuels, our society also depends on thousands of products that begin as crude oil.
Heavier crude oils contain more complex molecules, so they are better for producing many of these niche products. However, turning heavy oil into high-quality products also requires more advanced molecular processing than is possible with simple refining or distillation.
Consequently, using heavy oil requires substantial capital investments in additional refining processes, such as cracking or coking, or so-called conversion capacity. With the requisite additional investment and processing cost, heavy oil typically has been priced less than light oil. In May, for example, Bloomberg data show that Western Canadian Select (WCS) heavy oil averaged $54 per barrel, while West Texas Intermediate (WTI) light crude oil averaged just above $70 per barrel.
The ability to process the heaviest crude oils has vastly expanded the Western Hemisphere’s oil resource and supply potential, as these oils come mainly from Canada and Venezuela. Therefore, many U.S. refiners are configured generally to process heavy crude oil.
Shifting purely to light crude oil could underserve some product markets and idle (or even strand) the hundreds of billions of dollars invested in refinery conversion capacity. The supply, demand and prices for various crude oils and products have continually solved this equation for producers and refiners to determine the role that crude oils of different qualities should play in the market, in accordance with economic fundamentals.
Since the U.S. energy renaissance has accelerated, however, most of the 4.8 mb/d of new U.S. oil production the past six years has been light oil. With U.S. refining capacity geared toward a diverse crude oil slate, a key implication for U.S. petroleum trade is that it would be uneconomic to run refineries solely on domestic light crude oil. Consequently, the United States:
- Must import crude oil of different qualities to optimize production, given its mix of refining capacity; and,
- Has more light crude oil than it can handle domestically, while this same quality of oil is in high demand in Asia Pacific and other regions that mainly have simple refineries (without conversion capacity).
Therefore, differences among crude oils are important reasons why the U.S. continues to import oil in an era of domestic abundance and export light oil that can be problematic, operationally and financially, to handle with existing U.S. refinery capacity (but also is of great value to refineries globally).”
https://www.api.org/news-policy-and-issues/blog/2018/06/14/why-the-us-must-import-and-export-oil
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The article dates back to 2018, but refining oil has not changed very much since then.
The US is and has been the largest producer of oil, every year for the last six years.
“March 11, 2024 (Reuters) – U.S. crude oil production lead global oil production for a sixth straight year, with a record breaking average production of 12.9 million barrels per day (bpd), the Energy Information Administration (EIA) said in a release on Monday.”
The bottom line remains that oil is a very complex marketplace, far more complex than most people realize. The US is doing fine in oil production, matching production to demand. This will be my last post about oil for a while. Next week I’ll look around the world at a large economy.
Technical Analysis:
For the week ending 6/14/2024, the S&P 500 was up about 1.8%.
Technically (see chart below) the market looks positive. RSI at the top of the chart is overbought at 71 and rising. Momentum shown by MACD at the bottom of the chart is positive. The price action is positive, setting a new record high in the past week. With the market overbought and at record high, the risk of a correction is there.
Click THIS LINK to open the chart in a separate window.
A few weeks ago I bought some RSP, the equal weight S&P. It has not gone anywhere, while the S&P has continued upward. That tells me that the Mag 7 continue to provide most of the gains and carry the market higher. I will continue to hold the RSP, with a 5% trailing stop loss under it.
What am I doing? I was active last week. I had a few shares of ADBE which jumped on good earnings and they said AI a few times, so I sold it. If it falls a little I will try to buy it back. With stocks moving up, I was able to buy back Put options that I sold several weeks ago with the market down at the time. I bought NVDA after the split and placed a 3% trailing stop loss under it and the trade is profitable on paper now (still have the stock).
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I would like to call your attention to a page of my blog called “CLASSICS”. It is located at the top of the blog, on the banner just under the title. The banner has links to “Home”, “About”, and now “Classics”. These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.
There are currently 3 Classic topics posted: 1) Is it a bull market or a bear market? 2) Why does healthcare cost so much? and 3) Implications of a large national debt. (posted August 2022)
You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window. If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones. The picture in this post is a static .jpg so it does not update.
I am a retired person and preserving capital and seeking income are important objectives for me. I also want a growth component to my portfolio, while minimizing major risk. My style of investing will not suit everyone. I like to sleep well at night. Investing involves risk, including the risk of loss.
Rich Comeau, Rich Investing
Rich Investing 