Sound bites: US Energy insider sentiment sinks as crude oil rallies

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A poor jobs report last Friday has had the perverse effect of helping to send US stocks, as tracked by the S&P 500 Index, to new year-to-date highs. The disappointing news shut down Fed talk of a June rate hike, a proposition that in our view had little to do with a hot jobs market or consumer price inflation. Instead, the concept of a tightening likely gained momentum within the Fed over concerns that commercial real estate risks are beginning to boil. Nervousness was on display last month when the Boston Globe reported that Federal Reserve Bank of Boston president Eric Rosengren warned that commercial real estate prices had jumped above the peaks reached before the financial crisis.

In contrast to investor enthusiasm for US stocks at current prices, insiders are content to sell into strength. Our INK US Indicator dropped slightly last week and now sits just above the 40% level at which point there are 2.5 stocks with key insider selling for every one with buying. We more or less appear to be heading right back to where we were a year ago when the S&P 500 was straddling 2,100 while our indicator was flatlining at just under 40%. That preceded a major collapse in markets in the month of August. While we do not know if the US market will be taking a similar journey this summer, insiders on balance are taking a pass on going along for the ride.

Insiders in the Energy sector seem to be joining the rally skeptics. Right now, the sector is only one of two which we have with fair-valued insider sentiment reading, the other being Financials. Our Energy Indicator has fallen by more than half over the past two months and now sits at just above 40%. Insiders appear to be taking advantage of $50 oil to take more money off the table. As such, we have the sector on watch for a downgrade to overvalued.

In Canada, we note that Suncor (INK Edge outlook: mixed; SU Jun 8 close $35.47), which has more or less delivered flat real returns over the past year, announced a substantial offering of stock this week to raise $2.5 billion in cash. For investors who are hungry to buy oil patch stocks, lack of supply does not appear to be an issue. That investor demand as of Wednesday appears to be strong, with Suncor closing above the $35.00 deal price.

The weak readings in our US stock indicators suggests that valuations are too expensive in light of either the risks or opportunities. That said, stocks could continue to move higher on the prospect of a weaker greenback which would conceivably boost future earnings of export-related companies. It could also provide a tailwind for commodities including oil. Indeed, the oil market can be driven to extremes via sentiment and easy money as opposed to supply and demand characteristics which are hard to accurately assess at the best of times.

Given that the Fed is once again dragging its feet on a rate increase, it would not surprise us to see another round of significant asset price inflation. Unfortunately for investors, it is not usually obvious ahead of time which asset or assets will attract most of the easy money that is sloshing around. Meanwhile, as the US economy show signs of slowing (noted by negative labour market conditions, a World Bank growth downgrade and falling productivity), the Fed faces the potential of having the worst of two bad worlds: a possible recession combined with an asset bubble in oil, real estate or some other asset surprise yet to be fully recognized by either investors or policy makers alike.

Listen to Ted Dixon on Roundhouse Radio FM 98.3 every Thursday for his weekly financial markets commentary at 7:30 am Pacific Time. If you missed the live interview for this week, catch the replay here. This article includes material from the US Market INK report which was distributed to INK clients on June 8th.

 

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