ie: retracement possibilities and what it ''REALLY" means for us -
First; once again - do not confuse my trimming of some of my non core positions - read (taking profits) to 25% cash in an effort to ''buy cheaper'' as anything other than longterm bullish. I want to buy more stock here - but I want to buy cheaper than where we were of late - less than OSX 65-70 levels.
While I may not be blowing the horn as loudly as Big Bull - but then again who is (VBG) ! I simply still do NOT see the catalyst over the next 3-4 weeks to sustain the OSX over 65ish. Sure, Oil prices are bullish and they may well stay at $16-17 for the next few weeks - that does not matter; the Street is NOT worried about what Oil prices do during the next 3 weeks - they ARE worrried however about what OPEC does compliance-wise; because this is the entire KEY to what Oil Prices do in the 2nd half of 1999; and Oil prices in the 2nd half of 1999 hold the entire key to OSX stockprice performance from this point forward.
If OPEC blows compliance on the new cut agreement and we see cheating initially - the Oil Traders will punish us and the Stock Traders will punish us. The entire move here is NOT based on earnings, rig utilization, or dayrates (except E&P's VBG !). It is based on the future expectations of Earnings recovering based upon the Intnl Oil Majors increasing Cap Ex spending in the 2nd half of 1999. Their increase in spending is linked to their confidence in the probability of Oil ''sticking'' above $15-16; and that depends entirely on OPEC's compliance with their new cuts. If OPEC cheats, or complies poorly - Crude prices will fall and the Cap Ex expectations will not improve for the 2nd half and we will pay the price.
Personally, I do think that OPEC will comply; their entire survivability rides on this agreement - it would be suicidal not to adhere to the cuts. I also think that the Saudi's have driven home the point that they will be poised to punish the cheaters - an open spiggot war ''could'' develop if the other players do not fall in line.
Today we saw a major, one day rotation into cyclicals; there was an allmost panic move of massive amounts of Institutional money from the Mercks, Wal Marts and Tech Stocks into the Alcoa's, Intnl Papers,Cat -Deere's and into Oils. I do not think that our move today was entirely sector related - that is good and that is bad. We were long overdue for sector rotation, but it was for the wrong reasons imho... people seem to be forgetting that we sold off when crude oil was rising - $17 Oil does NOT guarantee OSX 66+ nearterm imho. Longterm it will support OSX 85 to even 100; as the sustained price will produce higher cap ex spending, rig utilization, dayrates etc. The Oil companies must feel that Oil prices will stick; (read) - they must believe that OPEC will comply, before they start spending money again.
There is still 4 weeks untill we see the initial reports on OPEC's compliance. That is a long time for the sentiment to waffle. Human nature and especially the nature of the Oilpatch is to lean to the negative of late. There is just not any ''new'' positive news (catalyst) to drive us higher nearterm. The only possibility is continued sector rotation into cyclicals. I am not convinced that this will continue... hope it does, but am not betting on it. I just see the coming series of earnings releases to steadilly pound home the recurring story of weak and potentially weaker yet, Rig utilization, dayrates and especially earnings. The shorts will be poised to turn it on heavy here at the first hint of this cyclical rotation slowing - bank on it.Its good trading. The high flyers will be targets - have to be gimmies imho for $2-3-4-5- short trades; they will at least make a concerted run on us shortly - bank on it.
Salomon Smith Barney downgraded NOI today off of their release and even lowered the rating on Apache due to in part, its rapid price appreciation and has some intersting commentary on the nearterm expectations here; again - do not confuse longterm for nearterm - we are speaking nearterm here (no reason for buy & holders to panic):SSB's comments below.
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Oilfield Service - March Quater Earnings Outlook
Salomon Smith Barney
Monday, April 12, 1999
--SUMMARY;
-March quarter earnings for the service companies will be down an average of 64% vs. last year and over 40% versus the fourth quarter of 1998.
-Oilfield activity remains extraordinarily weak with worldwide rig count
down almost 35% in the quarter and still declining. Most activity
indicators are at all time lows.
-We have previously reduced our estimates to reflect these conditions but expect there will be some negative surprises, eg WFT, CAM, GLBL.
-We expect that disappointments and cautionary comments on management conference calls will dampen the enthusiasm reflected in the recent rally.
A 10-15% downside is possible for the OSX.
-Improving structural factors support our outlook for a measured recovery in 2000. A pullback in the shares should be used as an opportunity to accumulate positions in our favorite names -HAL, SLB, PGO, WFT, GLBL, HC, HOFF.
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all in all - the story here is when is it prudent to add to positions ? With 5 OSX runs of 45-72ish in 7 months - it certainly is not the time to buy on days like today - quite the contrary, trimming positions - selling a little into strength for traders has proven very prudent. Buying on the blowoffs as well... be smart - no reason to change from what has been working for 7 months here like clockwork. I totally agree with SSB that we can expect a pullback here - as in general; there just isn't any positive news from this earnings period to build any base upward . The expectation that Crude holding here alone , will be enough to sustain a move up in the OSX is also imho, invalid - there is just not ANY short term driver to keep our momenteum here; I still see us breaking under OSX 60 and will not be surprised at a bounce off of 55/58ish... and concur with SSB to use that level as a buying opp and not here - do not chase these stocks here imho. (PGO excepted VBG ! )...
good luck |
