Posted on 2020-02-14 19:40:00
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Legendary investor Jim Rogers observed that commodity markets have to fall below the cost of production to finally make a bottom. This wipes out the bull market excesses off those who borrowed too much money. Their debt load forces them out of the game, bankruptcy or merger, as the “strong hands” take over.
This column has warned that low LNG prices might/would threaten the billion dollar LNG export terminals being constructed in Corpus Christi and elsewhere along the Gulf Coast. Sure enough, Cheniere symbol LNG (how is that for irony?) dropped 3.4 percent Thursday to a new recent low of $57.65. Debt-ridden Chesapeake CHK is trading at 54 cents.
The entire energy complex (crude, heat, gasoline, natgas) registered lows this past Tuesday. Taking those lows out will suggest any hope of a mild temporary recovery has been erased, which we suggested last week. The low Tuesday for natural gas was $1.80. Overproduction and lack of transport to markets has overwhelmed demand and price continues to fall.
As we have so often observed, to make matters worse, the U.S. dollar has surged to a new high. Asian contagion flu has investors running away from all things China and embracing the U.S. dollar, up 1.2 percent Thursday. The last high was 99 on the dollar index. I expect that be taken out this next week. Commodities like gold, silver, and energy are priced in U.S. dollars. A stronger dollar means commodity prices fall and still maintain their relative values.
Even if crude manages a short-term rally from its oversold condition here at $50.95, the wave patterns suggest lower prices over the next month. As posted last week, if the $50 level falls, $40 looks likely.
Narrowing breadth is a feature of a topping stock market. Just five stocks, MSFT, AAPL, FB, GOOGL, and AMZN account for 18 percent of the S&P 500. And it is their continued rise and weighting that is powering the averages to new highs. This reminds one of the top in 2000 when dot.coms, GE, and MSFT dominated. Speaking of which, TESLA is now worth well more than the big three automakers in the U.S. $55 billion of TESLA was traded on Tuesday more than the next ten most traded stocks including several of the FANGS.
TESLA is now valued at 183 times its $4.10 earnings. This looks awfully frothy to me, especially as social mood deteriorates further at the end of the State of the Union message.