• 4 minutes Pompeo: Aramco Attacks Are An "Act Of War" By Iran
  • 7 minutes Who Really Benefits From The "Iran Attacked Saudi Arabia" Narrative?
  • 11 minutes Trump Will Win In 2020
  • 15 minutes Experts review Saudi damage photos. Say Said is need to do a lot of explaining.
  • 14 hours Iran Vows Major War Even If US Conducts "Limited Strikes"
  • 4 mins Ethanol, the Perfect Home Remedy for A Saudi Oil Fever
  • 12 hours Europe: The Cracks Are Beginning To Show
  • 1 hour Hong Kong protesters appeal to Trump for support.
  • 13 hours Memorize date 05/15/2018 cause Huawei ban is the most important single event in world history after 9/11/2001.
  • 9 hours Ban Fracking? What in the World Are Democrats Thinking?
  • 3 hours Millennials: A boil on the butt of the work ethic
  • 22 mins A little something for all you Offshore swabbies
  • 11 hours When Trying To Be Objective About Ethanol, Don't Include Big Oil Lies To Balance The Argument
  • 13 hours LA Times: Vote Trump out in 2020 to Prevent Climate Apocalypse
  • 4 hours Shale profitability
  • 2 hours US and China are already in a full economic war and this battle for global hegemony is a little bit frightening
  • 4 hours Saudi State-of-Art Defense System looking the wrong way. MBS must fire Defense Minister. Oh, MBS is Defense Minister. Forget about it.
  • 22 hours Yawn... Parliament Poised to Force Brexit Delay Until Jan. 31
  • 9 hours Let's shut down dissent like The Conversation in Australia
Alt Text

The Restoration Scenarios For Saudi Oil Supply

After the largest supply disruption…

Alt Text

Wealthy Saudis Are Being Bullied Into Buying Aramco

Saudi Arabia is pressuring wealthy…

Alt Text

The Man That Could Trigger An Iran War

Tensions between Iran and its…

Martin Tillier

Martin Tillier

More Info

Premium Content

Energy Stocks May Be A Safe Haven For U.S. Investors

If numbers released last week are to be believed, the U.S. stock market is about to experience a sharp correction at the very least. On Friday, when GDP growth for the last couple of months was revised there was one other statistic released that got very little airplay, but which should serve as a loud, clear warning to equity investors. In 2014, according to the Bureau of Economic Analysis (BEA), corporate profits declined by over $17 Billion, or around 8 percent compared to 2013. That is the worst decline since 2008.

Of course we know the reason for that, at least according to under pressure CEOs; Dollar strength was the excuse du jour for poor performance in 2014, particularly in Q4. The problem, though, is that the numbers don’t support that. Most of the appreciation in the Dollar did come in the fourth quarter, with a 5.04 percent increase in the index during that time, but that doesn’t account for the quarter’s 1.6 percent drop in profits. Related: U.S. Oil Glut Story Grossly Exaggerated

Overseas sales account for 46 percent of S&P revenues so a 5.04 percent dollar appreciation accounts for a 2.33 percent (46% of 5.04) decline in revenue. Factor in an average margin in the S&P 500 of 10.5 percent and dollar strength is directly responsible for only a 0.53 percent decline in total profits in Q4. When the same calculation is done for the year, the mighty Dollar explains only a 0.62 percent drop; a long way from the 8.3 percent actually recorded.

Even allowing for the competitive disadvantage that accrues from a strong home currency for exporters those numbers suggest that overall profitability was declining as well. The U.S. stock market, however, fueled by easy money and inflationary policies around the world, posted huge gains last year and is up again this year to date. The market has two basic functions; it is a reflection of current corporate profits and a forward discounting mechanism for future growth. The figures suggest that it is failing in the first regard, which is likely to cause overly optimistic expectations in the second. In other words, a major correction has to come. Related: T. Boone Pickens Points The Finger At U.S Shale

The problem for most investors, however, is that it may not come straight away. Even if a drop in stocks is logical the old trader’s saying that the market can stay illogical longer than you can stay solvent comes into play. For that reason, and because most retail investors have a multiyear time horizon for their investments, getting out of stocks altogether at this point is not a viable option. Some shifts in a portfolio designed to minimize the effects of the drop when it comes, though, may be a wise move.

Ironically, one of the best places to hide may be in the worst performing sector from the second half of last year; energy. The 40-60 percent drop in most energy related stocks was down to the collapse in oil prices. Most are aware that that was, in turn mainly due to an expansion of U.S. production, but there was also some trepidation about global growth amongst oil traders. Related: Oil Prices To Fall Or Fly Depending On Iranian Nuclear Talks

If those fears are correct it wouldn’t be the first time that oil has moved ahead of stocks in predicting a slowing global economy. Because of that dramatic fall in oil, though, and the resultant pressure on energy stocks in general, an economic slowdown is already priced into the sector. That makes it likely that energy will outperform when the rest of the market catches up.

It may seem crazy to predict a big drop in stocks and then suggest investing in what is traditionally regarded as a volatile sector. Not all corrections are alike, however. Every situation is different and, when the decline is the result of an economic slowdown that is already priced into energy, doing just that may make sense.

By Martin Tillier for Oilprice.com

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage



Leave a comment
  • Fred Bothers on April 03 2015 said:
    Soon 30-40 respected universities will divest fossil fuels, sending a clear message that we must curtail our use of these harmful fuels. Just as in the case of the tobacco industry and the boycott of South Africa Apartheid, middle-of-the roaders will increasingly understand that it is time to make changes.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play