We’ve got a few troubling questions that need answering, and if you can give us a hand, we’d be much obliged.
To start, oil prices have dropped from near $100 a barrel last June to a low of just $45 a few weeks back.
Transportation accounts for roughly 30% of the nation’s energy usage. So it stands to reason that the transport sector should have thrived during this last blast lower in crude, no?
Lower costs, higher profits. It’s gotta be…
So what’s this? –
This chart is a paste-up that compares the Dow Jones Transportation Average (DJTA) with the United States Oil Fund ETF (NYSE:USO), a proxy for NYMEX Crude Oil Futures.
And it shows that something is quite clearly amiss.
While oil fell some 43% over the period in question, the Transports rose … only 4.5%!?
And nearly all of that gain came in the first three weeks (far left side of chart) of the time frame examined.
Hard to figure what happened, but the DJTA have essentially flatlined while the oil world plunged.
DJTA Should Have Surged…
So What Happened?
It’s a riddle. And here’s another from our friends overseas.
We know that in light of ongoing sluggish growth, the Eurozone central bankers have decided to launch a round of quantitative easing (QE) that devotes very large sums toward continental bond purchases. This was viewed as a last recourse for the ECB who, in their anxiety over a lingering recession and potentially full blown deflation, felt it necessary to take a drastic step.
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We know, too, of the incredible flight to the dollar that this engendered over the last year. It was spurred on most recently by the tragedy unfolding in ancient Greece, a catalyst for further jitters and the worst financial exorcist horrors.
So we were flat-out shocked at seeing the charts that follow –
And we ask, is this an environment that induces consumers to go out and spend (above, blue)?
Is this what it takes to induce nearly 4% year-over-year retail spending growth in the Eurozone (right hand chart)?
Or was it just a horde of rich Americans, equipped with their steroidal dollar, galloping across the old country on a buying spree?
And what’s with that surge in Ireland? And Portugal? Italy? We were told these PIIGS nations were all but broke?
So, where’s the money coming from? Makes you wonder…
It’s no secret that corporate America is flush with cash. Some $1.4 trillion is sitting in their collective piggy banks. That’s a record-high number that’s waiting for what we hope will be a blowout capex spending spree.
But when will it happen? Not so fast, apparently.
Because corporate America is also issuing debt at an unprecedented rate in order to take advantage of the lowest borrowing rates of the last 5000 years.
Look here –
Wait, wait, wait… Why the need to issue debt at all if so much cash is stacked up under the mattress?
And the question’s a good one.
Some will claim that companies are about to go hog wild on the M&A front, looking for growth through acquisition in a muddle-along economic environment. Others argue that there’s a more mercenary aspect to the bond sales – that many companies see the advantage of selling debt at 3.5% and using those funds to… wait for it… buy back their own stock!
Yet there’s sense to the move, if recent history is any guide.
With the S&P 500 averaging a 30% return every year since the bear market bottom six years ago, it follows that there could be windfall profits to be had from such a strategy, as companies like Apple (NASDAQ:AAPL) have already proven.
Taking a few billion dollars out of the bond market for next to nothing and throwing it at your stock will almost certainly spur additional buying, from both Wall Street and Main Streets. If the banks are bending over backwards to package the offerings – they need to make money, too, after all – why not give it a whirl? Sell the stock after it pops, pay off the bondholders and keep the remainder.
Our question is, where will at all end?
We need your input. Share your opinions on these riddles below.
Many happy returns,
Matt McAbby, Normandy Research
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