What Oil Prices Are Saying
The Bloomberg headline reads "Stocks Fall on
Earnings." As you know, I've been watching for signs that 2Q earnings
would be disappointing. And while analysts have lowered their estimates
slightly, we have still not seen any significant profit warnings for 2Q
earnings season.
Earnings season kicks off with Alcoa (NYSE:AA) next
Thursday, July 12. It would seem as though the window for earnings warnings
has all but closed.
In fact, just this morning, we've gotten upside earnings
guidance from Samsung, State Street (NYSE:STT) and Dollar Thrifty (NYSE:DTG).
Still, there's no doubt that investors are worried about
earnings. It seems like there is a disconnect, as if investors are worried
without ample cause. But on the other hand, the stock market is usually
pretty accurate at discounting the future, and I am not going to be the that
says the stock market is wrong.
Oil is one of the
purest measures of economic health. When the economic outlook is good, demand
is expected to rise and oil prices rise, too. But oil's recent trading has
certainly not been strong.
The quick pop up to $78 as hurricane Alex became the first
named storm of the season notwithstanding, oil has been trapped in the mid to
low-$70s since late May.
The weakness in oil wouldn't be a concern, if there were not
clear threats to Gulf of Mexico supply in the wake of the BP spill.
Gulf of Mexico
supplies 31% of U.S. demand. It's not clear how much of
the supply will be threatened by drilling moratoriums or higher costs, but
there is a threat. And still, oil has been unable to trade with any momentum.
Of course, I believe that oil is one of the best medium- to
long-term investments anyone can make. It's just too expensive to bring new
supply to market for oil to suffer any truly significant drop in price.
And companies that have low cost supply nailed down, like
those exploration companies in North
Dakota's Bakken oil pool, are the cream of the crop and will reward
investors.
But the Bakken reserves are not enough to affect global
supply by more than a million barrels a day.
Oil is pointing to economic weakness in the U.S. Bakken
stocks should be bought on weakness.
Analystsexpect the
S&P 500 to earn around $80 a share for all of 2010. At current levels,
the S&P 500 is trading with a forward P/E of around 12.
Now, that $80 a share estimate is not a leftover from months
ago. It's the result of earnings adjustments from Citigroup,
UBS, and Goldman Sachs that are about a month old.
It would seem that these estimates account for weakness in
Europe
and potential weakness in China.
Cautious optimism is the appropriate stance, as it seems
clear that investors are in no mood to anticipate a positive 2Q earnings
season.
TradeMaster Daily Stock
Alerts' Jason Cimpl believes a bottom for
stock prices is near, and he has been recommending beaten down Chinese stocks
and using tight stop losses to lock in gains. Just yesterday, his readers
took 14% gains on a Chinese coal stock before the market reversed. They held
the stock for 3 days.
Now, Jason has a couple other Chinese stocks on his radar.
One fertilizer stock he's ready to pounce on has a forward P/E under 9 and
could jump 20% or more in a matter of days.
He hasn't pulled the trigger yet, but if you want in, you
can get details HERE.
As always, thanks
for all of your comments, and please keep them coming:dailyprofit@wyattresearch.com
