Canary In The Oil Patch

• April 8, 2002
• Peter Navarro

Market
Trend: The Very Young Bull Encounters Hurdles

Sector
Watch: Semiconductor Manufacturing, Housing, Regional Air Transports

Macroplay
of the Week:
(
OIX |
Quote |
Chart |
News |
PowerRating) — Canary in the Oil Patch

Weight
towards Cash

The Broad Market Outlook

Earnings
warnings, war premiums for oil, and the reemergence of that specter of a double
dip recession. These are the
increasingly high hurdles that our very Young Bull is trying to jump over. Increasingly, it has been a stumble and a tumble.

President
Bush finally came out with both a strong statement and a clear plan for a
resolution of the Israeli-Palestinian conflict. While the stock market did not react positively, the oil markets did,
with the price of a barrel of crude dropping several dollars on the initiative. Still, there remains a significant war premium built into the oil price
— as much as six bucks a barrel — that will drain consumer pocketbooks at the
gas pump and raise business costs. Moreover,
there is a further complication in that both OPEC as well as the big oil
companies are showing unusual discipline in maintaining a favorable supply-demand
balance to ensure firm prices. This
is all contractionary and a threat to a strong recovery.

On the
earnings front, the big problem is not just that some companies aren’t meeting
their consensus estimates, but rather that they are lowering their forecasts for
the next several quarters. This
bodes ill for a resurgence of business investment that MUST be the engine that
drives a strong recovery. 

While
the economic data now suggests that a double-dip recession still remains a
remote possibility, a collapse in business investment — coupled with a Middle
Eastern crisis chill on the consumer — could revive fears of the double dip. The only good news is that the bond market is clearly downgrading the
probability of a Fed rate hike in the wake of all this turmoil. 

Accordingly,
these troubled times would be an excellent interval to weight the portfolio
toward cash until we get some signal of resolution on several of these fronts. You
can win — or lose — very big, but it is impossible to know whether the odds
are in your favor.

Sector Watch

If we
are going to get a recovery, it’s going show up in semiconductor manufacturing
— the mantra of this column for weeks. Note
that this sector ordinarily builds strength before the semiconductor
equipment manufacturing sector. However,
in the current market variation on this theme, semiconductor equipment
manufacturing is HOT right now. 

An
article in Barron’s suggests that its irrational exuberance and the
sector — and Applied Materials
(
AMAT |
Quote |
Chart |
News |
PowerRating) and
KLA-Tencor
(
KLAC |
Quote |
Chart |
News |
PowerRating) — are way ahead of themselves. Still, from a technical point of view when viewed through the lens of
momentum, this sector looks good. Watch
the market sort this out and see who wins — the Barron’s Bears or the
technicians. If AMAT and KLAC
fall hard, Barron’s rules.

Watch
also for a collapse of both the housing and regional airlines sectors over the
next several months. The
housing sector stocks are simply too rich, based on historical P/Es, and higher
interest rates will soon catch up with this sector. And regional airlines are about to catch pneumonia from their ailing
benefactors like United and American.

The Macro Data — The Coming Week

The
Producer Price Index is going to come out relatively hot on Friday and the newswires and CNBC will likely be
atwitter. There
will be nothing to get excited about, however, IF the PPI price spike is simply
reflecting higher oil prices and a rise in “non-core” inflation. Just be sure to distinguish between what happens to the core PPI, which
excludes food and energy, and the total PPI.

Retail
sales and the University of Michigan consumer sentiment index on Friday will
provide a further glimpse into the psyches and pocketbooks of the American
consumer. 

The
only other big data point of note will be the International Energy Agency’s
monthly oil market report. It’s
normally a yawner — except in these troubled times.

Macroplay of the Week: OIX — The CBOE Crude
Oil Index

The big players in the
oil market are going to do a lot better job parsing all of the data on OPEC’s
movements, the likelihood of a resolution of the Israeli-Palestinian conflict,
the probability of an oil embargo by several of the OPEC countries, the
willingness of Russia to play along with OPEC, the internal discipline of the
major oil companies, and so on. So,
in light of current market uncertainties, best ye start watching closely the
price of a barrel of oil. It’s
got to get down in the very low 20s for our Young Bull to break out of its pen.Watch
also the Chicago Board Options Exchange oil index or OIX — the canary in the
oil patch. yes”> These companies range from Amerada Hess(
AHC |
Quote |
Chart |
News |
PowerRating) and British
Petroleum(
BP |
Quote |
Chart |
News |
PowerRating) to Occidental(
OXY |
Quote |
Chart |
News |
PowerRating), Phillips(
P |
Quote |
Chart |
News |
PowerRating), and Exxon(
XOM |
Quote |
Chart |
News |
PowerRating). Until this chart builds a strong downward momentum, it will be too
risky to hold big positions in the market. So, use this index as a leading inverse indicator of the broader market
trend. 

Check
out this chart. Note the inverse
correlation of the
(
QQQ |
Quote |
Chart |
News |
PowerRating)s with the OIX. OIX
started sniffing trouble around the end of February. Note how the Cubes
do a swoon beginning in mid-March as the OIX marches
upward. Note finally the last few
days in the chart after President Bush took some air out of the oil balloon with
his tough speech.

If you
have a favorite macroplay or stock you would like us to consider in this column,
send an e-mail to peter@peternavarro.com
or go directly to my web site https://www.peternavarro.com. 
We’d love to hear from you.