"Only those who will risk going too far can possibly find out how far one can go." -- T.S. Eliot; "Guess Tarullo read a lot of Eliot"-- Your pal.
WTI crude found support in the $49.80s Wednesday night, after traders largely ignored a reported weekly draw by the Energy Information Administration, focusing instead on a larger-than-expected build in the gasoline space. The numbers really should not have surprised all that much. In both cases, the data was indeed telegraphed by the API numbers that were released on Tuesday night. There were, however, some surprises lobbed at energy markets, at least from this trader's perspective. For one, the U.S. really crushed it last week as an oil exporter. Really, really crushed it. The U.S. exported 1.984 million barrels per day last week, an increase of more than 25% from the week prior. By the way, if you follow this stuff, or if you just dig big data, last week's sub 1.5-million bpd print was a record at the time; so this sub-2.0 million bpd number is just astounding.
All in all, Brent prices had risen faster than the West Texas variety in crude's recent run up, leaving the U.S. in a sweet spot for exports to both Canada and China, as well as diminishing the need to import oil. The aftermath of the storms that had curtailed U.S. production as well as the refiners had artificially created pop demand for Brent, pushing the spread between the two to nearly $7.0 two weeks ago. That spread between Brent and WTI stands at $6.13 Wednesday morning -- still wide enough to make shipping U.S. crude worth the effort.
It is at levels above $50 that we see China's strategic demand pull back just a bit. Data showed that the planet's thirstiest nation for oil only required 8.0 million barrels a day in August, in case you were looking for a fundamental reason other than profit taking for WTI's pullback from the $52 level. That said, Russian president Vladimir Putin, whose economy is highly reliant upon the energy space for GDP growth, did his best to talk up the commodity over the last 24 hours. He indicated that his nation's alliance in this space with the OPEC cartel will extend well past this March, through the end of 2018. That is called a trader talking his book, gang.
So, going back over a month, the energy sector is the best performing sector, up a nifty 7.5%, though the sector is in the red over the last two weeks. Success in the space, particularly for the shale crowd, may rely as much on speculative buying and selling in Brent and the health of that spread as much as anything else. That's the short-term driver. It's the expected growth in global demand, getting China back on track, and keeping India on trend that matters most longer term -- that, and U.S. dollar valuations, which have not been a recent friend.
I think that oil services giant Schlumberger (SLB) -- a stock that is also held in the Action Alerts PLUS charity portfolio that Jim Cramer co-manages -- is the global demand play. Putin is not the only one that can talk his book. As that stock pulls back from prices close to $70, it is no longer technically overbought. We now face a very likely bearish moving average convergence divergence (MACD) crossover on the six-month chart. There are two support levels stacked close together here. I will not worry much, even on a test of $67. I will worry much more on a test of $65.80, especially if we do not see some dollar weakness by then. That makes unrest in Spain, and those awful eurozone retail sales for August, all the more important to this space, believe it or not. The Oct. 26 ECB policy meeting awaits.
This company is making bank on oil.
All They Had to Do Was Ask
Now that I've touched on central banking, let me roll up my sleeves. Heard the one about the Fed Chair who found slow-growing consumer level inflation to be a mystery, and wasn't quite sure if there was, or was not actual slack in current labor markets? No? Well, here's a new one for you. Our old friend Daniel Tarullo spoke at the Brookings Institute in Washington on Wednesday.
Daniel Tarullo? Isn't that the clown that spent eight years earning a reputation as an enforcer and central figure in the beefing up of the of regulatory environment in the wake of the financial crisis? And then, upon leaving the Fed, indicated that there was scope to reform the "Volcker Rule" on proprietary trading because it damaged market making activities at the banks? Yeah, that guy. I remember just being aghast at the lack of professionalism at the time.
On Wednesday, Tarullo said: "The substantive point is that we do not, at present, have a theory of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policymaking". Tarullo also pointed out that economists put a bit too much faith in un-observable concepts like the natural rate of unemployment and the neutral real rate of interest. You really can't make this stuff up, can you? How long now have all of us in the private sector been openly telling those at the Fed that the Phillips curve was less useful in the modern economy? I know I have been writing about this for years.
So, we have a Chair who does not understand why the answers are not always found in the textbooks, and we have the guy that felt he went too far with regulation, but waited until his departure to say anything about it, comfortable enough to criticize the rest for this crew for putting too much faith in concept. The funniest thing is, if they needed help, all they had to do was ask.
This Land Is Mylan
So, the home-gamer stares at his or her screen this morning, and must ask themselves: Is it OK to buy Mylan (MYL) here? And is it OK to buy Teva (TEVA) here? How odd to ask the same question about two firms currently spinning the wheel of fortune from differing perspectives. Well, differing short-term perspectives, anyway.
Mylan runs up 16% in just one day, after announcing on Tuesday evening that the FDA had, in surprise fashion, approved its generic version of TEVA's Copaxone, which is a drug aimed at the treatment of folks suffering from relapsing forms of Multiple Sclerosis. The problem there, gang, is that Teva derives about 10% of the firm's overall sales from this drug. The stock sold off 14% yesterday. It must have seemed ironic to some that once upon a time, TEVA had tried to acquire MYL, but that is a tale for another time.
The truth is that while TEVA closed at $16.08 last night, the stock's 200-day simple moving average stands at $28.95. A year ago, the stock traded at $45. Broken. The surge seen in shares of MYL left that name at $37.80, just above that name's 200-day SMA of $37.48. The $40 level has been staunch resistance for this stock since early April. Technically, it looks to me like we have to test $36.50 before we'll know if this move has any legs. I would be slow to commit anything more than the expense of options-related premiums on this name here. Don't forget, this stock traded at $46 in March.
Two troubled pharma names fighting over a can of beans. Both seem broken to me. One has a shot, but that's all it is, a shot. As an industry, the pharmaceutical industry sub-sector of the healthcare sector has had a decent year, nearly performing (+11%) in line with broader markets. Not these guys, though. You can find better places for your hard-earned dough.
Why'd you miss Jim Cramer talking about Mylan?
08:30 - Initial Jobless Claims (Weekly): Expecting 265,000, Last Week 272,000. In two of the last three weeks, expectations were for 300,000 or more in response to the terrible storms that hit Texas and Florida. In both of those weeks, the number did not even come close, which is a good thing. The four-week moving average, which is the right prism through which to look at this item, is now up to 277,750.
08:30 - Trade Balance (August): Expecting $-42.6 billion, July $-43.7 billion.
08:30 - Exports (August): July $194.4 billion.
08:30 - Imports (August): July $238.1 billion. The trade deficit has trended lower in recent months, as a generally cheaper U.S. dollar has lent itself toward a climate where exports have gapped higher over the last two months, while imports have methodically decreased over a four-month span. The Atlanta Fed will adjust their third-quarter GDP projections on Thursday after this news hits the tape. That projection now stands at an annualized 2.7% q/q. Do not get comfortable with whatever comes out of Atlanta this morning, as they will likely have to adjust again tomorrow after the BLS prints the jobs data for September.
09:10 - Fed Speaker: Federal Reserve Gov. Jerome Powell will speak on the Treasury market from New York City. Powell's name has suddenly come up in speculative talk over who the next fed Chair might be, so although he is already a voting member of the FOMC, now his words likely will take on greater importance.
09:15 - Fed Speaker: San Francisco Fed Pres. John Williams is set to speak on community banking this morning from St. Louis. Williams does not vote on policy until January. That said, he has been openly hawkish for some time now. He even opined two weeks ago in Zurich that he felt the new normal for the fed funds rate would be around 2.5% going forward.
09:30 - Fed Speaker: Philadelphia Fed Pres. Patrick Harker is expected to speak on labor markets from Austin, Texas. Harker had been hawkish for most of the year, but has cooled his jets somewhat of late based on weak growth for consumer level inflation. Harker, who is a voting member of the FOMC, will open himself up for questions at the conclusion of this event.
10:00 - Factory Orders (August): Expecting 1.0%, July -3.3% m/m.
10:00 - ex-Transportation (August): July 0.5% m/m. Don't be fooled by the weak headline number in this space for July. That was strictly due to the volatility that is regularly seen in the way aircraft are ordered. The core number is the one followed here, and that print has been fine. This item will not greatly impact financial markets upon release due the dated nature of this information.
10:30 - Natural Gas Inventories (Weekly): Expecting 61 billion, Last Week 58 billion cubic feet. Natural Gas broke back below $3 earlier this week, finally finding support at $2.90, which roughly where this commodity found support in both July and August. We expect to see a 27th consecutive weekly build reported in this space today. Inventories in this space are streaky, and highly reliant on cold weather. Last year's streak did not end until December.
16:30 - Fed Speaker: Kansas City Fed Pres. Esther George will also speak on labor markets form the same conference in Austin that Patrick Harker spoke at earlier. George, a well-known policy hawk, does not vote on policy this year, and will not vote again until 2019.
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: 2561, 2554, 2541, 2529, 2519, 2512
RUT: 1527, 1520, 1513, 1506, 1499, 1491
Today's Earnings Highlights (Consensus EPS Expectations)
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