Three Mysteries of the Market Examined (DJTA)

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? –

DJIA-AND-USO

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.

WTH

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 –

RETAIL-VOLUME

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?

Strange, no?

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…

Riddle #3

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 –

NEW-ISSUENCE

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.

Not bad.

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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See what people are saying...

  1. Joe Comfort

    I think we know WHERE it will end. Not pretty at all. The big question is WHEN it will end.

  2. Tim Wyllie

    Where will “it” all end. Same place as always: greed and fear.

    1. The transports fuel costs are all hedged; so, they don’t benefit from the fall. Similar to companies who have large overseas earnings exposure and their greed left them unhedged to dollar exposure. What? Me Worry? The U.S. is too weak for a dollar trend change.

    2. Greece et al? Are those figures from their respective government’s? U.S. Government numbers are so massaged, they are fake. Why shouldn’t theirs?

    3. That one’s easy. Kinda of like sex by the book. Econ 101. There are two costs of capitol: Debt and Equity. The CFO quants have a knee jerk reaction. People trust them because of salaries 200 X what they are worth. So they leverage the balance sheet. By accident, they might be right for a short term. But then the currency reform gets them and they will only be paid 20 X they are worth.

    It ends with global currency “reform”. Everybody is fucked except the bankers who are in control of the reform. Always protect the house. Only equity survives. in countries that have an army. Horsemen of the Apocalypse have a field day everywhere else. Commodities collapse because the floor traders are gone. “Danger, Danger Robinsons”.

    There is the silver lining. ROTFLMAO

  3. george

    DJTA my wife and I own sunshine truckline inc.Bowling Green,KY. the reason for a flat DJTA is because the shipping rates are based on the price of diesel fuel.as cost of fuel goes down,so doesthe rate.so profit margins are no larger than before.this is called fuel surcharge. thanksfor asking.hopes this helps. George

  4. brian

    never ends,fed won’t let it.only way it ends is if the whole world implodes.

  5. Greg

    When China makes its next official gold reserve announcement will mark the beginning of the end.

  6. Dan H

    Doesn’t borrowing at 2% and buying back your own stock to avoid paying a 3.5% dividend make good sense? Especially if it increases your stock price and you can sell your personal stock to your own company as Corp. insiders are doing at 20 to one selling vs buying their own stock?
    The real question is, what are the insiders doing with the money they cash out: Paying full capital gains taxes on it and stuffing their matresses with the rest? Avoiding taxes by using tax-advantaged strategies? Going to real assets (with commodities down, farmland floundering and oil plays questionable, is it just multifamily housing and art?) and if so, which ones? What are we missing???

  7. Bob

    The DJTA was priced too high. With the drop in Oil, its now perceived as fair value.

  8. Alan Rogers

    “How long can the drunken sailor (no offence to them) go for before he falls ? sometimes longer than you think

  9. Bob Patterson

    Stock repurchase leads to bull market.
    Stock sell-back at higher prices means the beginning of the end for the bull market.
    The sell-back will be to the general public.
    That will spell the end to this bull market.
    Look out below.
    Be patent and long in the meantime.
    Bob Patterson

  10. Auric Gilder

    Crude’s amazing price slide was certainly seen in radically lower gasoline prices, which has been a great relief to the tax and regulation oppressed American country class, however over the road diesel fuel barely budged off the $3.50 price point. My theory is that the stubbornly high price of diesel kept the DJTA flat.

  11. chris

    Oil vs transports has more to do with a more sluggish economy and an unimpressed consumer that really does not see lower gas as a reason to buy more things. I would say the massive surge in USD has made our exports suffer so hence the overseas shipping and freight will suffer. We sea BDI at all time lows so that also portends a weak world market as there is no way the tankers are still building much since the last boom bust period and many are being used to store oil.
    US cash is more than 60% overseas held captive by stupid Washington that believes in double taxation. That money will buy European or Brazilian or any other company in a crashed currency state. The money here is not a lot. Most well run companies retain at least 10% or more cash reserves versus revenue and maybe half of all that cash are held by only a few dozen of the biggest companies (Apple, MSFT, Google, etc.). Yes, they sell bonds (short the dollar) at very prices low interest and use that money to retire stock, create more treasury stock and hence more options. Wash rinse repeat.

  12. David Reppert

    I do not think the S & P 500 has averaged a 30% annual gain for the past 6 years as you state. That would mean it would have compounded to about 5 fold. In reality it has compounded 3 times or about a 20% annual return. Still pretty good.

  13. Dave K

    Bob Patterson and Dan H have pretty much got it nailed and Matt has answered his
    own question. The phenomenal liquidity existing in both the corporate and banking
    coffers can continue to orchestrate buy backs and asset allocations when any one sector stalls simply by strategic redirection. We have created a controlled safety net of liquidity to boost assets in any needed sector when required. The bull is NOT dead nor is their a scintella of evidence of inflation so enjoy the currency race to the bottom by central banks. lower prices, and nominal growth. Sure, it will end, but NO signals showup worth all the discussing, ad nauseum, in these encyclicals written by Normandy Research, The Dailyn Bell and other erstwhile investment analysts. If GE doesn’t tell you how filthy rich we are and have in liquidity and why you must stay in stocks nothing will.

  14. Karl

    While you have a strong dollar and low interest rates, one borrows money here and buys companies in Europe and Asia where the currencies and markets are depressed, then wait for the collapse of the fiat dollar and the rise of other currencies. Oil suppliers have to realize sooner or later that if they insist that customers pay for oil in their own currencies, that it will strengthen their own currencies and economies. Since real gold is no longer a medium of exchange, but black gold is, then the rial could become an international currency. He who has the black gold makes the rules!

  15. Dusty

    Transportation means trucks. The truck companies, according to something I read, only make a profit from fuel cost hedges. Price of fuel drops, hedges are dropped, profits disappear(ed). Check it out.

    Part 2: I drove big rigs for two decades and changed careers to escape that industry. Drivers load and unload freight instead of resting because the shippers and trucking companies refuse to pay for loading and the situation is worsened by receivers insisting that the ‘tie’ on a pallet be changed. Same number of cases of goods. Just harassment and management heads stuck . . . The cost of a loader at each freight dock (plus the bribe that most load dock supervisors insist on if the load is to be taken off or loaded on in a reasonable length of time) would be more than the driver’s salary or net. Enough said. There is also theft and other corruption that costs money for both drivers and companies and the entire trucking industry works at a basic loss. Regulated fees for service are being held well below rates of inflation and real cost increases.

    I was caught in this very briefly. Had to tough it out and be discriminated against because I couldn’t pay the bribes or pay a loader. Pull off the road and sleep and be cussed for delivering late. I got a different job just driving from place to place and other folk picked up & loaded trailers and then delivered at destination. Fixed my own problem. Until I got a different job in an entirely different industry that really improved my life.

    The CDL was only half implemented. The part that put screws to drivers was supposed to be the Part 1; the part to help drivers, Part 2, was ignored and then dropped. Management in truck companies and in the shipping and receiving units of everybody else insists they have no clue and what I said is BS. You know the name of the River.

    What else? This is all very real. Just as soon you read and then delete.

  16. Sam Niazi

    Well, it seems you are one of the few that are willing to talk about this.
    I give you two words: “FINANCIAL ENGINEERING”.
    it is magical, it has been creating wealth from nothing. The maystro ” Allen the Greenspan” in a slight of hand, he told us that “the economies of bubbles will be the norm.
    So the talking heads in wall street say “why argue with some thing that works??”. It does work for them. This is good as long as it works, but when the fat lady sings there will be hell to pay!!
    But, by that time the likes of “Goldman Sachs” would have taken positions to profit from the financial collapse. It is not a market anymore, it is a market of financial power centers. The “Engineers of the finance” will have already secured positions that will make them even more money. It is just the timing.

  17. Jameson

    “Am not sure that the questions are correctly framed. Fuel is only one part of the transportation company expense; labor is far more important, as are the crippling capital costs imposed by new EPA regulations (cost of a tractor = truck) is up about 50% in 5 years. Largest part of the transportation averages are trucks. Air fares have gone down in real terms, other costs have soared. In the rail sector, the impact on crude-by-rail has been severe, as has the destruction of demand for utility coal.. Still, worth exploring.”

    From a friend of mine in the transportation industry.

  18. David

    It ends where it always ends. At the point where the wise are made to look like fools and the fools are made to look wise.

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