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May 22, 2024 | US Stock Build Adds To Downside Price Pressure – A Breach of US$75/B is Likely in the Near Term

Josef Schachter

As a 40 year veteran of the Canadian Investment Management Industry, Josef Schachter has experienced several exceptional and turbulent global economic and stock market cycles. With his primary focus on the Energy Sector, Josef is able to weave global political, economic and monetary issues with current energy data into a compelling story of what's going on in the sector, what is to come, and why.

Market bulls lifted the Dow over 40,000 last week but worries about interest rates and Treasury record refundings have pulled it back to 39,800, a still overvalued level. Everyone is waiting on the market’s Santa Claus ‘Nvidia’ to show steller new AI products and record profits to give the M7 bulls another reason to push their favorite momentum stocks higher. We are late in the game in this investment cycle and any disappointments could cause a stampede out from the small exit funnel, when bulls disappear with their BUY orders. Look at MEME Gamestop (GME) which got its pied piper to recommend the stock and the early followers saw it rise from US$10.70 per share to US$64.83 per share two weeks later. Did the pumpers sell?  “Of course” and the follower lemmings are left with a stock now trading at US$20.85 per share.

Some of the new economic data points we are watching include:

  • China home sales are falling faster despite government lending and intervention. Taking luxury homes and converting them to low cost housing will not work as the new owners don’t have equity to be buyers and the amount provided for conversions is too small to have an impact.
  • China and Japan are selling US treasuries at record amounts to build up their reserves and also are buying gold as they see the US financial picture deteriorating and the upcoming US Presidential election as divided as ever. Neither is seen as supportive of either country.
  • US Industrial Production stagnated in April as manufacturing struggled for traction. Boeing is a big casualty as orders it should have gotten are being moved by buyers to Airbus due to the increase in BA’s problems and management ineptness in solving the manufacturing and testing of its jets. They need to sweep the house and add quality control steps that are not there now.
  • The IEA is warning that the energy transition may be slowed considerably due to a short supply of critical minerals. China and Russia provide these to the world so sanctions against the two countries could backfire.
  • Cuba’s banks have collapsed leaving citizens stunned and destitute. Bank accounts have been emptied and ATM’s are void of cash. One more disaster for the people and their failed socialist experiment.
  • OPEC is now planning a virtual June 1st meeting, rather than in Vienna as global inventories remain close to the long-term seasonal average according to Reuters. They plan to keep their present quota system and gamble that international growth doubles the IEA forecast.
  • President Biden and Candidate Trump have agreed to two debates. Mikes can be cut off by CNN in the first debate and by ABC in the second if one of them speaks over their allotted time. There will be no audience.
  • President Biden can’t seem to do anything about the border crisis but seems to have grabbed Congressional power to forgive US$7.7B of student loan debt of 160,000 young people today. He has lost young supporters but those given this largesse may change their mind and vote for their benefactor. In the meantime those already with debt forgiveness have used their funds saved to pay their student loans to invest in MEME stocks on Reddit recommendations and used Robinhood Markets to lift their trading to record highs. Clearly a risky gamble.

On the wars front:

  • Israel’s incursion into Rafah continues and four hostages that were killed have had  their bodies taken home for burial.
  • The US built pier is now unloading large amounts of needed supplies but as the trucks leave the protected area they are stolen by gangs and Hamas. The poor 2.5 million civilians are not on the receiving end of this aid.
  • NATO is talking about sending Trainers (likely to start French troops in french uniforms) into Ukraine to help utilization of the new military equipment being sent in. This would be seen as a clear NATO attack on Russia and this could quickly escalate. Where are the diplomats trying to de-escalate things?
  • A Panamanian Oil tanker was struck by a missile off the Yemen coast so this threat has not been fully controlled by allied forces.
  • Russia has renewed exports of gasoline and diesel as their refineries are back producing products after the Ukrainian air attacks.
  • Russia has made progress in space based weapons and plans to add more hit and kill missiles to kill allied satellites that are aiding Ukraine. Russia could even add a nuclear weapon and be the first to do so. It will be hard for the US to catch up. If NATO sends troops into Ukraine (even trainers) wearing NATO uniforms, the war drums will be noting the start of WWIII.

Market Update: The general consensus of bullish stock market investors is that the Fed will cut rates in September and that earnings will hold up justifying much higher levels for the indices. If earnings become problematic as we are seeing from many of the S&P 500 (except for the AI, M7 and FAANG names) then stocks have a lot of air in them.  We are watching the economic data carefully as it appears that consumers are getting tapped out and this could drag down the economy at some point. The offset is the 6% US deficit and large war spending that are keeping some areas of the US, with hot economies.

Energy stocks peaked in early April as crude reached its high of US$87.67 on the mideast war premium expansion. The run from early February was very rewarding and the ideas on our SER BUY List for the most part did very well. We see the general market and the energy sector as vulnerable. A correction should occur and that would provide the next low risk BUY signal which we see occurring during Q3/24. The S&P/TSX Energy Index peaked at 308 in week two of April and has fallen today to a low of 293 (now 294). A downside target below 240 in the coming months is likely. The overbought condition can be confirmed from the S&P Energy Sector Bullish Percent Index which rose from 39% bullish in February 2024 to 91% three weeks ago. Recent weakness has pulled this Index down to 65% today (down 5% in a week). Over 90% is an overbought reading. It  should decline below 20% to give off an oversold level and a BUY window once again.

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May 22nd, 2024

Posted In: Schachter's Eye On Energy

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