Thursday Thoughts: What Now High Dow?

Well we hit 20,000 – now what?

As exciting as it has been to get here, the view from the top is kind of scary.  In yesterday's Live Trading Webinar, we shorted the Dow Futures (/YM) at the 20,000 mark and the Dow topped out at 20,069 for a $345 per contract loss but we decided to ride it out since the Dollar is rising and earnings are not that hot so we are expecting at least a small retracement after the 2,000-point (10%) post-election run.  

We're still shorting oil (/CL) at $53.50 and our friends at BP have finally seen the light, stating in their 2017 Energy Outlook that oil demand will grow at just 1.3% per year through 2035 (down from 3.4% in the past two decades) and oil supply will continue to outpace oil demand (due to increased efficiency and renewables), ultimately leading to something I have been saying will happen for years:

The surplus should spur increasing competition between companies and producer nations to ensure their assets were not left “stranded” as demand gradually shifts from oil to cleaner forms of energy. The result is likely to be “quite significant pressures to dampen long-run prices”, according to Spencer Dale, BP’s chief economist.

Stranded oil is a difficult concept to grasp after hearing about peak oil for years but the bottom line is that there is more discovered oil in the ground than the World is EVER likely to use because demand for oil is crossing below supply as alternative fuels gain traction and efficiency increases.  At a certain point, oil will be as much of a fuel as wood is today.  

That's a problem for Energy Companies and their investors, as well as for countries that depend on oil for their revenues and that's why the Saudis NOW, are investing $2 TRILLION to move their economy off oil before it's too late.  Meanwhile, they are going to sell all the oil they can for as much as they can but so will US oil holders and everyone else in the World for that matter – it's a warehouse clearance sale and EVERYTHING MUST GO!  

Needless to say, we are not big fans of the energy companies moving forward.  We do like Natural Gas (UNG), which is a cleaner-burning replacement to other fossil fuels for the near-term but, in the not too distant future, they are all going to lose out to solar, which gets exponentially better every few years.  As you can see from this chart, solar is just about to become the cheapest way to power a home (or car) – without subsidies!  

With the natural progression of solar efficiency and a similar improvement in battery technology, 2035 looms large as Doomsday for the fossil-fuel industry, not to mention utility companies – another investment I would start unwinding while they are riding these market highs.  

While this does not mean, in the next 18 years, that we may have spikes in Oil or Natural Gas prices – this is a very important thing to keep in the back of your mind for your long-term investing goals.  We're not there yet so the Energy and Utility companies can pretend it isn't happening but it's up to us, as investors, to know better.

Rex Tillerson's Exxon (XOM) and Chevron (CVX) are two major Dow components who have added 560 of the Dow's 3,000 points since early 2016, so about 20% of the Dow and I'll say right now that CVX is a good short at $117.50 as the expectations for earnings ($4.72) are based on unrealistically bullish expectations for oil prices.  June $100 puts are $1.05 and have a delta of 0.12 so a $5 drop in CVX should punch them well past $1.50, which would be a quick 42% gain if it works out. 

For our Members this week (featured in yesterday's Live Trading Webinar), we're looking at trades that will work under a Trump Administration and some of them are infrastructure but Caterpillar (CAT) just threw a big damper on that by lowering guidance and stating:

"Our results for the fourth quarter, while slightly better than expected, continued to reflect pressure in many of our end markets from weak economic conditions around much of the world," Umpleby said.

Additionally, the company does not expect to see any meaningful business from a Trump infrastructure bill until 2018.

"Prospects for tax reform and an infrastructure spending bill in the United States are encouraging," a release from the company said. "While these initiatives would likely be a solid positive for many of our businesses, we would not expect to begin to see meaningful effects of these changes until sometime in 2018."

As I've been saying all month, the market has been getting WAY ahead of itself at Dow 20,000, S&P 2,100, Nasdaq 5,650, NYSE 11,350 and Russell 1,380, recently boosted by the weaker Dollar, which is also silly as the gist of the policies Trump is announcing are bullish for the Dollar, not bearish.  Meanwhile, as noted by CAT, the rest of the World is still essentially in a recession so what is the Dollar weak compared to?

The Dollar rising back to 103.50, which it will do on any sort of disruption in the rest of the World, will send commodities down 2.5-5% and the indexes down about the same so keep an eye on the Dollar and tomorrow morning we get the Q4 GDP Report and next Wednesday is a Fed announcement – fun and thrills ahead!  

Be careful out there…