Here's What Merrill Lynch Says...
From today's Wall Street Journal...
10 a.m.: OK, maybe now it is time to sell energy stocks, say strategists at Merrill Lynch. After a historic four-year run that has realized a total return of 152% for the S&P 500's energy sector, easily outpacing the rest of the market, Merrill's Brian Belski dropped the sector to "underweight" today, citing "near-term negative cyclical trends," which he says outweigh the long-term secular trends "that remain in place."
Mr. Belski writes that the sector is set to underperform thanks to fundamentals that have peaked, such as earnings growth and profit margins. Also mixed in are increased volatility of commodities prices and excess speculation in futures contracts. In other words, the very things that were helping the sector in the last few years now stand as obstacles to further gains. The Amex Oil Index, which gained 120% between 2003 and 2006, has recently run into trouble. That index was up 21% on the year through Aug. 1, but since has fallen 11%.
"The secular scenario is well documented (and agreed upon) regarding global demand accelerating and production capacity, labor and technology constraints," he writes. "However, recent commodity price weakness, slowing global demand, increased supply, rampant speculation and unfavorable weather patterns (warmer winter forecasts and minimal hurricane visibility) have led to volatile stock performance and decelerating earnings momentum."
My view: Oil has just hit a 7-month low. The time for this warning was some time ago. It wouldn't surprise me to find out we're seeing the same kind of "rush to bearishness" that we saw last week when all the hedge funds lined up on one side of the boat. Unless we are heading into the teeth of a recession, this drop in prices should be a short-term deviation from the big uptrend.
10 a.m.: OK, maybe now it is time to sell energy stocks, say strategists at Merrill Lynch. After a historic four-year run that has realized a total return of 152% for the S&P 500's energy sector, easily outpacing the rest of the market, Merrill's Brian Belski dropped the sector to "underweight" today, citing "near-term negative cyclical trends," which he says outweigh the long-term secular trends "that remain in place."
Mr. Belski writes that the sector is set to underperform thanks to fundamentals that have peaked, such as earnings growth and profit margins. Also mixed in are increased volatility of commodities prices and excess speculation in futures contracts. In other words, the very things that were helping the sector in the last few years now stand as obstacles to further gains. The Amex Oil Index, which gained 120% between 2003 and 2006, has recently run into trouble. That index was up 21% on the year through Aug. 1, but since has fallen 11%.
"The secular scenario is well documented (and agreed upon) regarding global demand accelerating and production capacity, labor and technology constraints," he writes. "However, recent commodity price weakness, slowing global demand, increased supply, rampant speculation and unfavorable weather patterns (warmer winter forecasts and minimal hurricane visibility) have led to volatile stock performance and decelerating earnings momentum."
My view: Oil has just hit a 7-month low. The time for this warning was some time ago. It wouldn't surprise me to find out we're seeing the same kind of "rush to bearishness" that we saw last week when all the hedge funds lined up on one side of the boat. Unless we are heading into the teeth of a recession, this drop in prices should be a short-term deviation from the big uptrend.
Check out my new gold and energy blog at MoneyAndMarkets.com
posted by Sean Brodrick @ 11:07 AM
<< Home