Professor Elam

Dispatches from the Market Front

We consistently warned of a top in oil prices this summer, now it is here.  Oil prices have dropped 50% since June. Now what?  Look for support at $60-70. OPEC, which has never shown the ability to stop prices from falling, has moved its emergency meeting to Oct. 24.  While Russia and Venezuela are not OPEC members, we expect their influence will have considerable sway.  Predicting what politicians might do is beyond our crystal ball, but even the suggestion that Russia might experience ‘supply interruptions to Europe’ would snap prices back.

Patterson Energy PTEN reflects the Andrews service economy. It has lost two-thirds of its value since June returning to the $12 level.  This price for PTEN has not been seen since 2002 when oil was $20!. The reality will be a cutback in the amount of time service companies can work, and a resultant collapse in all overtime wages. That means a lot less disposable income in West Texas. We hope readers, and their bankers,  used the $145 oil price to eliminate debt as we suggested.

The weak stock market reflects the reluctance of banks to loan. Fearing their own demise, banks have been afraid to loan for fear of not getting paid back.  Yet the London Interbank Rate LIBOR is easing and there are signs the flood of Central Bank money is starting to help.  Understand that the collapse in commodity prices from grains to oil has been spurred by the inability of normal commercial wholesalers to simply finance inventory shipments. This is the ‘oil’ that lubricates everyday commerce.  Hopefully that lubricant will start to flow as the US focuses on the new Big Four Banks (BAC, C, JPM, WFC) that will run the US financial system. Watch the stock prices of those banks for signs of renewed confidence, they are off their recent lows.

October is the worst financial month of the year.  We hope that the recent  lows seen in stocks will not be violated and that DJIA 7943 holds. Two weeks remain to exit October and the November elections.

Meanwhile we should see shocking new lows for commodity prices this next two weeks. We suspect it will be a buying opportunity. The adage suggests ‘buy low sell high’ but most do the opposite.

The next crisis will involve municipalities of all kinds.  Municipal bond prices have tanked 20%. This suggests real fear on the part of those investors that municipalities will not be able to re-finance their obligations. As usual, California is already in crisis mode, Vallejo is in bankruptcy and teacher payrolls must be financed statewide. In Texas marginal homes that cannot be sold are quickly up for rent. But the prices of materials used to construct those homes have collapsed. So the ‘home’ is literally not worth the lumber prices used to build it.  The answer is for home prices to do what stock prices have, tank. But are local governments ready to admit that local homes are not ATM machines for endless higher property tax bills? Cities, counties, schools will have to admit that property tax roles are grossly inflated. Local tax payers will soon revolt over inflated valuations.   Already schools in the Dallas area (DISD, Lancaster) are cutting wages or laying off employees. Get ready for much, much more of this state wide. Watch municipal bond fund prices like FRHIX for signs of improvement.

Retailers are pressed. The Toy Departments of boats, RVs, airplanes, second homes, etc. will shortly be subject to fire sales. Watch the retail SPDR XRT for signs of a bottom. 

Silver lining department-Airline stocks have bottomed as LUV hit long time support at $11.50.  Remember that the Andrews economy runs exactly opposite the US economy. As the Permian Basin  soared earlier this year the US was set to tank, it has. Now Andrews will undergo a pullback, watch PTEN for signs of improvement.  Lower gasoline prices will at least provide some cushion for consumers, if not in Andrews…..

One hardly needs an expensive econometric service to track popular sentiment. The ultimate shrine to the ‘Pinnacle of Misplaced Hope’ is surely the ‘Strip’ of palatial gambling palaces in Las Vegas. MGM Grande (MGM) and Las Vegas Sands (LVS) have matched the collapsed of the Dow Industrials in 1929. They have lost 90% of their value since the highs last year. So forget the Council of Economic Advisors. Just pop MGM or LVS into your favorite stock quote system for a look the real pulse of American consumer confidence.

Dennis Elam has authored  a weekly newspaper column in West Texas for over ten years. I will be publishing it on the blog in an attempt to add more coverage of markets.