"We should not look back unless it is to derive useful lessons from past errors, and for the purpose of profiting by dearly bought experience." -- President George Washington
The week ahead looks sleepy enough, at least at a glance. Once one allows oneself to linger over the weekly docket for more than a couple of seconds, it quickly becomes apparent that this sleepy week will ramp up rather quickly as the days pass. Friday will bring with it the unofficial kick-off of earnings season, as several of our higher-profile financial institutions such as JP Morgan (JPM) , Action Alerts PLUS charity portfolio holdings Citigroup (C) and Wells Fargo (WFC) go to the tape with their quarterly numbers. Not to mention that on that very same day, the various forces that be will bestow upon us further information on consumer level inflation, industrial production, retail sales, and business inventories, all red-star-level macroeconomic events.
On the way to that noisy Friday, Fed Chair Janet Yellen will be heard from twice. First, on Wednesday, she'll testify on monetary policy and the U.S. economy before the House Financial Services Committee. Then on Thursday, the Chair will repeat that trick before the Senate Banking Committee. These twin testimonies, and the doctor's response to questioning will, despite the data coming at week's end, be what most impacts the marketplace this week. Yields and currency valuations will move around on spoken words, and then yields will move everything else. The Minutes just released showed some division on when to start the trimming of the central bank's balance sheet, the planned program also known as "quantitative tightening". You all know that I oppose tightening policy on both levels congruently. Yellen will be pressed on this, as well as the trajectory of interest rate policy. Let's not forget that Dr. Yellen also referred to asset valuations as "somewhat rich" in her recent London appearance. If this is not part of the testimony, it will almost certainly come up in the back-and-forth that comes after. The lack of both inflationary pressures and wage growth will also certainly be in focus, despite what appears to be rather robust job creation.
The pressure on crude prices continues this morning. It appears as if the commodity is leaning toward an eventual re-test of that $42.75 level that was pierced in fairly sharp fashion back in mid-June, before snapping back technically. There really are two factors here, on top of speculative flows that are going to matter going forward. Supply and demand? Well, yes, simply put. Although I was thinking more along the lines of OPEC's behavior in the face of their policy failures, as well as of the response of the U.S. shale crowd to recent weakness in the space.
Since we did mention demand, it is still there, and growing, most of the growth coming from developing economies. As long as that's true, then production cuts and freezes are still a viable strategy going forward. Price discovery just may not be exactly what sellers had anticipated. First, let's take a look at OPEC. We now know that the rest of OPEC is starting to lose patience with both Libya and Nigeria. Both of whom, being exempt from the OPEC cuts previously agreed to due to civil unrest that hampered their economies, have seriously increased production. Over the last nine months, Libyan production is up more than 600,000 barrels a day, while Nigeria's is up 200,000 barrels a day. Given that the agreed-upon cuts by the entire cartel were meant to withhold 1.8 million barrels of oil from hitting the market every day, this is dramatically counter-productive to the group's mission.
Russia is hosting a meeting of oil producers in St. Petersburg two weeks from today. Several OPEC oil ministers have called for attendance at these meeting by officials from both Libya and Nigeria. Now, both are likely to resist, but my guess is that if they are indeed asked to attend, crude will see some appreciation in price ahead of that meeting, as markets misunderstand the fact that even if the two nations are asked to cut back, OPEC will not likely vote on such a matter until the next official meeting in November. Then there will be questions about cooperation. Still, the event, from a trader's perspective, could/will be playable.
Slowing (Where It Counts) Rig Count
Then there is U.S. shale production. We all know that story. U.S. production returned to growth this year (+11% y/y) as frackers filled gaps left open by production cuts elsewhere. The gang in the Permian Basin, due to technological improvements, have made huge gains in efficiency lowering breakeven points. At current market prices, U.S. production will likely land above 10 million barrels a day in 2018. Remember, for every one dollar per barrel move in the market price of WTI crude, analysts move their 2018 projections for supply up or down by about 100,000 barrels per day. In short, the U.S. is here to stay, gang.
That said, the proliferation of oil-producing rigs across the Permian Basin has stalled. Yes, I saw the rig count get back on track last Friday. Yes, U.S. oil rigs currently producing grew by seven rigs to 763 on the week. However, four of those rigs were in Alaska. Producing rigs located in the Permian actually dropped by one. In fact, rigs in the Permian are only showing a +1 in aggregate over the last four weeks. So, as low as break-even points are in Texas and New Mexico, that crew is not impervious to price pressures.
My Thoughts on Oil
Now, I could be wrong. I am just a guy with an opinion. That said, I am a guy with an opinion who actually tries to make some dough based on his own (hopefully) developed opinions. Like I said, the commodity appears to be set to test those mid-June levels. So maybe it does. OPEC seems frightened, and willing to make news. Actually, not willing, insisting on making news. You can smell the fear. The gang in the Permian is either at a saturation point, or taking a serious breather. Either way, that group has stooped being aggressive at these price levels. Do I see a short to medium-term pop? Maybe not a "pop", but if the commodity can pass this test, some relief may be in the cards. What you do with it, is your business. If you read me, you know that I've been long Apache Corp. (APA) for some time now, due to its low breakeven points and focused activity. The name remains my favorite in the energy space.
10:00 - Labor Market Conditions Index (June): Expecting 1.7, May 2.3. This "experimental" all-encompassing measure of labor market health released by the Federal Reserve Bank every month following "Jobs Day" has printed in headline expansion for eight consecutive months. For those not in the loop, this item is an index comprised of 19 different labor market related data-points, and is meant to be read as a way to gauge overall progress made in a single glance. This data-point has never really taken off as a focal point for traders and economists, as there is really so much good and bad that can be taken from almost every BLS report.
15:00 - Consumer Credit (May): Expecting $12.9 billion, April $8.2 billion. The expansion of consumer credit has slowed to a crawl over the last four monthly readings. Over those four, the average growth has clocked in at $12.2 billion, while this same data-point averaged growth of $19.8 billion over the six months prior. Demand for revolving credit has long been soft, but as auto sales have dried up, so too has demand for non-revolving credit. From that space, we have also seen softening demand for student loans. I am unsure exactly what to make of that.
23:05 - Fed Speaker: San Francisco Fed Pres. John Williams is back in Sydney, Australia tonight to speak about sustainable economic growth. Williams, who does not currently vote on policy, has been aggressively hawkish in his rhetoric this year. Recently, Williams recklessly opined on the stock market referring to the market as "running very much on fumes". There will be questions tonight. Wish I could ask them.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2442, 2435, 2427, 2419, 2412, 2404
RUT: 1433, 1427, 1420, 1414, 1404, 1398
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (HELE) ($1.29)
After the Close: (WDFC) ($0.91)
What's Hot On TheStreet
Tesla's Model 3 is born: Tesla (TSLA) CEO Elon Musk tweeted photos of the first Model 3 ever produced, which appears to be black, in the evening on Saturday. The car is going straight to Musk's garage. "Ira Ehrenpreis had rights to 1st car as he was 1st to place a full deposit, but gave those rights to me as my 46th bday present. Tks Ira!," Musk said on Twitter.
Musk has said that production should ramp up quickly with 100 Model 3s produced in August, followed by 1,500 produced in September and up to 20,000 produced per month starting this December.
These people: So, who exactly are the people approving the outrageous compensation packages for Apple (AAPL) CEO Tim Cook and Netflix Inc.'s (NFLX) top dog Reed Hastings? BoardEx, the relationship mapping service of TheStreet Inc., examined the directors who hold this power. The biggest takeaway: some of these people are on the boards for way too long.
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