Friday March 20 2020

8 24 AM CST

Don’t Get Complacent Quite Yet

Friday, march 20, 2020 , 5 37 AM CST

What I am trying to do is prevent the oil and gas sector from disappearing over the next 18 months

CEO Scott Sheffield, Pioneer Natural Resources

Here is an easy to understand Elliott Wave Analysis of the stock market decline since the top February 12 at

DJIA 29, 586.

Wave One Down 29, 586 – 25,000 Gee this is a surprise, what’s wrong?

Wave Two Up – 25,000 – 27,000 Okay, things are not nearly as bad as the media is making them out to be

Wave Three Down 27,0000 – 19,000 Something is seriously wrong, energy shares are in shambles

Wave Four under way – After a record oil price decline, a record percentage increase occurs, okay the big guys have this under control

Wave Five, yet to begin – Prices fall to the 16,000-18,000 level wiping out half of the February 12 market capitalization

I strongly believe this is a short-term guide to what is most liable to happen . While the Industrials have declined about 35%, the Transports are down 45%, suggesting lower prices ahead.

The energy share price declines are in the panic zone, Nustar NS has lost 80% of its February high. If it could maintain its dividend it would be a 35% yield.  That is not liable to happen.

To this point we have been told the international majors, like Exxon Mobil, have strong enough balance sheets to weather this storm. But that was a couple of weeks ago. XOM has lost 50% of its market value in 2.5 months. The dividend, if it survives is a whopping 10%.   Is that a buy, or an alarm signal for the entire industry?

The problem for energy is two-fold. First the Saudis and Russia have engaged in a price war, calculated to wipe out the US Shale Producers, see the opening quotation.   This is having that effect. Second, with everyone staying at home, and shipping and airline traffic all cancelled, there is lackluster demand for all things energy.   That is why Valero VLO has lost 2/3 of tis value since the February high..

The energy industry is asking for diplomatic help including sanctions against Russia. Asking the Saudis to cut production would only play into Russia’s hands, which is undesirable from the Mid-East Standpoint. And threatening Russia is problematic, as US Soviet relations are reverting to Cold War Status.

Elsewhere the rush is on for dollars. Ford cut its dividend, and Boeing has lot 2/3 of its value.

The balance sheets of companies are only an illusion. The illusion persists as long as investors believe asset values. But should faith in the assets fall, the liabilities still stand.

And that is why Wall Street is is scrambling for cash.

Isolation is probably the best preventive for virus spread. But even the US economy will not be able to withstand more than two to three weeks of shutdown. Already unemployment claims are rising. Most households do not have even $500 in cash. Should this shutdown be prolonged, the economic consequences will be severe. In short, this stock market ‘correction’ would not be temporary. Increasingly this looks like the start of a sustained bear market.

In a final note, it appears the long romance with Higher Education may have ended. Universities are cancelling classes (pardon, going on-line) but not necessarily re-funding tuition or room and board. The first signs of student discord are evident, questioning school expenditures.   This is yet another potential ‘default’ in the making.

Friday March 13 202

The DJIA is down another 761 points in pre-market trading this Friday. This suggests the markets are accelerating in what Elliott termed a third wave, the strongest of the five. If so, this first decline won’t end until the low 20s.

This Column, Last Weekend, Thursday March 12 DJIA Close, 21,085

If you have been reading this column you have been prepared for the big swoon in both oil and stock prices. New readers can catch up by reading our 2020 columns posted March 9 2020 at http://www.professorelam.typepad.com

Question – My 401K had gone to one million, last night it was worth $750,0000, what happened?

Answer – Investing rests on the fundamental accounting equation that Assets equal Liabilities plus Equity or restated, Assets – Liabilities = Equity.

In a bull (up) market which has existed since Summer, 1982, social mood becomes expansive. People want to invest, join groups, and believe in asset values. This investing inflates the value of assets, while liabilities (amounts owed) stay constant, (remember that by the way). Examples include Apple AAPL,, Disney DIS, or Exxon Mobil XOM. As Apple introduces the i-pod, then phone, then pad, investors reward the firm by bidding up the asset values. This is interesting in that Apple’s real asset, human intellectual capital, does not appear on the balance sheet.

Q – careful, I avoided accounting classes.

A – I know, bear with me. The example of Disney may be easier to grasp. As social mood improved, people spent more money by attending Disney theme parks, buying DVDs, and now streaming content on various platforms. So the value of the assets went up, resulting in an increase in Equity, the value of Disney shares. This continued as Disney trotted out new Star Wars movies and animations.

As fracking finally made America virtually energy independent, a new class of producers was born in shale areas. At $100 oil in 2014, prices of these shares soared. PExxon Mobil hit $82 back then.

Q – Uh, I know that, now what happened to my 4010K?

A-the accounting belief system works in reverse as well. Once all the true believers have bought in, the markets literally run out of buyers. Early adopters begin to take money off the table by selling to the late-comers. Doubt is expressed that the assets are really worth that much. This represents a mix of social mood occurring in fractals, at greater and lesser levels.  And so prices for XOM bounced between $62 and $80. The mood swings are grounded in the price of oil. Oil is both an economic and a financial asset. Hence the price of oil has far wider swings than its economic value.

Q-Okay, you did note on February 28, There is no sign of a technical bottom in oil as of this writing. What happened?

There really is no OPEC there is only Saudi Arabia. Their fellow conspirators in OPEC typically do not abide by ‘voluntary production quotas’ and well, cheat. This makes Saudi the ‘swing producer’ who is expected to cut back. A week ago the Saudis tried to get Commissar Putin to cut back Russian production to diminish world supply. Putin, also dependent on oil revenue for Russia, said no, preferring to squeeze shale producers with lower prices. And so last Sunday night the Saudis engaged in an Arab Stand-off and cut prices nine bucks a barrel.

Q – but doesn’t cheaper oil make fuel less expensive making manufacturing and transport cheaper?

A- Yes but, a crash in price puts energy service and many producers, laden with debt, out of business. Recall that while asset values vary in the real world, the lenders demand payment for debt on the books. Now the equation is changing. Asset values, oil in the ground or a closed Disney theme park, plummet. Equity values therefore decline.

All of this is magnified by the end of that bull market which began in 1982.

Q – How can you be sure of that?

A- Well Goldman Sachs came to that conclusion this past week. Many companies in the energy business are now trading at or below book value, like Exxon Mobil as well as lenders like Cullen Frost bank.

And it is not over yet. Lots of technical damage has been done. Prices re rebounding this Friday morning, DJIA is up 900 but the ups and downs for the immediate future may last until March 23-27. Then expect an eye-popping rally for a couple of weeks.

Brace for volatility, social mood can be both fickle, and fractal.