When Petrol Prices Begin to Bite

When Petrol Prices Begin to Bite

It’s an exciting time in the stock market…

Apple Inc. [NASDAQ:AAPL] is going to buy back another US$100 billion worth of shares.

That’s on top of the record amount it’s already spent over the last few years.

And even then it will still have cash left over.

It’s almost ridiculous how much money this company has. And to think it nearly went broke at one point years ago!

Apple is raising its dividend payout as well.

It’s fair to say this is all going with the trend.

Facebook, Inc. [NASDAQ:FB] and Amazon.com, Inc. [NASDAQ:AMZN] both surprised the market to the upside with their results.

All told, US stocks have come through their recent earnings announcements with gusto.

In my view, 2018 could still prove a very good year for global stock markets.

In fact, Apple gave another little clue as to why the outlook for stocks is bullish…and yet you probably didn’t notice.

Read on to find out…

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Apple making inroads into China

Reuters reports that Apple’s sales in China increased 21% from a year earlier. That represents Apple’s best growth rate in 10 quarters.

This is significant, as Apple has struggled to build up market share in China.

The domestic brands have a dominant market share and are cheaper (and some argue just as good, if not better).

Apple comes with a price premium in China — as it does everywhere else.

But I bring it up more as a reflection of the Chinese economy than anything else.

It’s one small signal that things can’t be that bad in the Middle Kingdom.

The perpetual China ‘doomers’ are constantly spouting that it’s going to collapse.

Apple sales and the number of Chinese tourists pouring out all over the world suggests otherwise.

But let’s go back to the US market. After all, it sets the tone and lead for the rest of the world…

Two sectors that can drive the US market higher

The tech companies have driven the bull market since 2009. As Apple, Facebook and Amazon have illustrated, they’re still posting great numbers.

But for the US market to lift strongly from here, I think we need some of the other sectors to fire.

I think we’re going to get it from two in particular: banks and energy.

Here’s the breakdown of the top S&P 500 sector weightings at the end of 2017:

  • Information Technology: 24%
  • Financials: 15%
  • Healthcare: 14%
  • Consumer Discretionary: 12%
  • Energy: 6%

What does this say about banks and energy?

Well, the US economy is booming, especially around the housing market.

That’s going to drive mortgage growth, all else being equal. That’s good for the banking sector.

Not only that but the Wall Street Journal reportedrecently that the big US banks still have incredibly low deposit rates despite the Fed raising the federal funds rate.

That means cheap financing for the US banks, which can give them strong net interest margins if deposit rates remain low. The potential for their earnings to rise from here is excellent.

Moving on to energy, the ongoing oil bull market is now generating strong cash flows for the US energy sector.

The shale sector is currently cash flow positive for the first time in years.

In March I put together a watchlist of shale oil companies in the US as part of my analysis into the energy sector.

Some of these stocks are really beginning to move up. Oil is high and there are good indications that the shale operators aren’t going to plough it all back in to new production.

They’re likely going to pay down debt and buy back stock with the cash they’re now generating if oil stays above US$60 a barrel.

That should drive their shares up even higher…

The dynamics in oil could send producers to new heights

US refiners are booming as well.

We got a hint of this from a recent deal announcement.

A company called Marathon Petroleum is going to splash out US$20 billion to buy out a rival, creating the biggest refiner in the United States.

But there’s an even broader dynamic at play in oil that needs attention.

The big oil companies like ExxonMobil [NYSE:XOM] and BP plc [LON:BP] have pulled back on exploration and capital investment over the last few years.

At first it was because the oil price was getting crushed.

But now it’s the fear that oil demand won’t be there (or denied and restricted because of climate change legislation) to meet new fields that come online.

It take years and billions of dollars to bring a major oil field into production.

It’s a bigger risk to commit to these kinds of lead times now than in the past.

And it’s why one hedge fund manager Bloomberg cited this week says that oil could be heading into its largest ‘supply shock’ ever.

The world still consumes a lot of oil every day, and will for the foreseeable future.

I’d say most people take cheap oil for granted…until rising petrol prices begin to bite.

We’re seeing the beginning of this.

Qantas just flagged a $200 million rise in expected fuel costs. Which says everything you need to know about where oil prices are heading.

Hopefully the US can keep the world supplied with oil, otherwise this may get much worse before it gets better.

Regards,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia