• October 20, 2020

ELAM: Pricey stocks, a new crude benchmark - Odessa American: Dennis Elam

ELAM: Pricey stocks, a new crude benchmark

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Posted: Sunday, October 18, 2020 3:00 am

The S & P 500 trades at about 22 times forward earnings, its richest price earnings ratio since the dot.com bubble.

Heard on the Street Wall Street Journal today

This statistic suggests stocks are at an extreme valuation. But bonds are the most expensive, therefore dangerous, they have ever been. The ten -year Treasury yields a mere .73%. The last time rates were this low was after WW II. Should the economy finally begin recovering due to a successful vaccine, the yield might return to say 2.5%. In fact this was the yield in early 2019. But if rates increased just that much, the bond holder would suffer a 16% drop in value. Bond prices move opposite interest rates.

After years of losses, investors have embraced Amazon as it re-invents shopping from home. Oddly Sears originally invented catalog shopping from home in the 1890s, now Sears is on the rocks. Here is an illustration of just how pricey some favorite stocks are now. Amazon is trading at a 128 price-earnings ratio. That is six times the value of the overall market.

Facebook trades at 32, Apple at 36, Google at 34, NFLX at 91, and Microsoft at 38. So the FANG group is 50% more expensive with NFLX and AMZN being the outliers. This is not to say prices cannot advance further. The overall stock market peaked February 12. These stocks are in the NASD which has made a new high, thanks to those stocks.

And the election is three weeks off. That may explain why stocks have ‘gone quiet’ this week.

Cushing, Oklahoma has been the storage point for crude oil and the basis for pricing West Texas Intermediate. But the shale revolution and multiple new pipelines to the Gulf Coast are changing that dynamic. This new Argus benchmark will represent oil stored along the Gulf Coast. It represents a combination of the East Houston Terminal operated by Magellan Midstream, three terminals operated by Enterprise Products and three offshore facilities in Houston, Seabrook, and Texas City.

Occidental Petroleum CEO Nicki Hollub remarked this week that American oil production will never again reach the 13 million barrels a day set earlier this year. She noted two mbd have been lost with decreased shale production. And the lockdown has gasoline demand much lower.

Unleaded gasoline futures have been unable to vault the 200 day moving average at $1.18. In the last three months natural gas futures have soared from $1.50 to $2.80.

I would agree that the Texas Energy industry cannot stand the Green New Deal. And that is why we do not hear much about it or Open Borders or Court Packing from Biden Harris. The election will be consequential.

DAILY OIL PRICE: October 16

  • Crude Oil: 40.88   (-0.08).
  • Nymex MTD AVG:  39.8317.
  • Natural Gas: 2.773   (-0.002).
  • Gasoline: 1.1688   (-0.0112).
  • Spreads: November/December   (-0.24)   December/January   (-0.30).
  • Plains WTI Posting: 37.25   (-0.25).
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