27 Feb ANOTHER VOLATILE DAY
Bloomberg writes the almost impossible has occurred. The weighting of the energy sector in the S & P 500 fell below that of the utilities sector for the first time in history. Bloomberg further writes the PE of the utilities at almost 21x sports the highest forward price/earnings ratio of any major S & P 500 sector, besting even the technologies.
Wow! This is another one of “those events” that should not occur. Utilities are not known for their growth potential.
The reasons for oil’s decimation are well known…alternative energy, inventory glut, fracking, demand destruction, etc.
Are these reasons valid? Bloomberg reports that a record $350 billion has been spent on alternative energy in recent years. Depending upon the source and what is included alternative energy—including nuclear and hydroelectric—equates to only 8-11%% of total production. The EIA is forecasting by 2040 20% of energy will be produced by alternative sources.
Yesterday’s oil inventory data indicated US oil production has stalled since the first part of the year. Six weeks ago, forecasting entities were suggesting a 10%-12% increase. Officials have stated that it is not yet clear whether this is just the effect of winter or something more structural in nature.
As noted many times, capital is virtually absent in the oil sector and all major oil companies are projecting flat to declining production for 2020.
Many times, I have commented about the outsized impact of technology-based momentum trading where in some aspects the greater fool theory is utilized—defined as finding another person to buy over priced shares. The inverse of the greater fool theory is investors dumping companies that are inherently worth more than the market is suggesting.
Markets tend to over react in both directions. Inflection points are never known until months after they occur. Change will occur but the pivotal question is as to when.
Commenting about market action, averages were volatile on coronavirus headlines.
Last night the foreign markets were down. London was down 1.98%, Paris down 2.33% and Frankfurt down 2.23%. China was up 0.11%, Japan down 2.13% and Hang Sang up 0.31%.
The Dow should open moderately lower because of the coronavirus. Treasuries are at record low yields. The 10-year is up 17/32 to yield 1.28%.