Oil Services & Valero
I've had a handful of posts surrounding the oil service sector and oil stocks in general. The July post of Valero here was an early indication that oil stocks are likely peaking. Now, in the last few days, Leuthold, an institutional advisory service has been quoted on Bloomberg as saying oil company insiders are selling massive and record amounts of stock. A coincidence? I think not. William Greehy, one of the biggest sellers, is one very astute CEO and it is simply not a coincidence he is liquidating massive amounts of stock for the first time in his tenure at Valero.
The quantitative work shown here has been a validation of a likely change in trend for oil stocks. And, for those who believe high oil means oil stocks are defensive with their low PE ratios, think again. These stocks are extremely risky at this time in the cycle. With massive profit increases these companies are still selling at multiples of ten to twelve times earnings. That low multiple is a value trap. The market is a discounting mechanism. It is telling you that the good times are not sustainable by only rewarding oil stocks with a low PE in an extremely cyclical business. In the 1970s as oil companies were printing money and oil was higher than today in inflation adjusted terms, energy stocks saw massive slides during inflationary recessive times. It would not be unusual to see these companies lose 50% or more of their value if a full blown recession develops.
I'll say it again, those expecting a weakness into seasonally weak October with a new bull market then developing later this year are highly mistaken. There are significant cycles at work which will likely trump the oft followed mid-term election cycle.
The quantitative work shown here has been a validation of a likely change in trend for oil stocks. And, for those who believe high oil means oil stocks are defensive with their low PE ratios, think again. These stocks are extremely risky at this time in the cycle. With massive profit increases these companies are still selling at multiples of ten to twelve times earnings. That low multiple is a value trap. The market is a discounting mechanism. It is telling you that the good times are not sustainable by only rewarding oil stocks with a low PE in an extremely cyclical business. In the 1970s as oil companies were printing money and oil was higher than today in inflation adjusted terms, energy stocks saw massive slides during inflationary recessive times. It would not be unusual to see these companies lose 50% or more of their value if a full blown recession develops.
I'll say it again, those expecting a weakness into seasonally weak October with a new bull market then developing later this year are highly mistaken. There are significant cycles at work which will likely trump the oft followed mid-term election cycle.
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