Last night, I disagreed with Larry about the meaning of earnings and the relative importance of energy and commodities.
Instead of abstracts, lets look a closer look at some hard data, via the WSJ’s David Gaffen. He points out some rather intriguing data points regarding the SPX and the relative contributions of its various sectors in terms of performance:
"Thanks to rising oil and gasoline prices, energy
stocks have had a lot to do with the performance of major stock indexes
in 2006 — a disproportionate amount when compared with their
representation in the S&P 500.Through the end of March, the
S&P 500 returned 3.73%, and energy’s contribution to returns was
21.1% of that, greater than any of the other S&P sectors.The next
closest was industrials, which contributed 19.5% of the S&P’s
returns through March. Here’s the difference between the two, though:
with just 30 issues, energy accounts for just 6% of the 500 companies
in the S&P’s key measure, compared with 53 industrial names, making
up 10.6% of the index.The difference between the combined market
capitalizations is narrower as a result of the strength in energy
stocks — at the end of March, the energy sector comprised 9.9% of the
S&P’s market value, compared with 11.6% for the industrial sector.
Without energy, the index would have gained just 3.2% [versus 3.713%] so far this year."
You can interpret what the message of the rally is, but consider this much: Energy continues to have a hugely disproportionate impact on both earnings and market performance.
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Also worth checking out: Mark Hulbert explains why Crude oil and stocks can’t keep on rising in tandem. (Something’s got to give)
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Source:
Energy Efficient
David A. Gaffen
WSJ, April 19, 2006 9:46 a.m.
http://online.wsj.com/article/SB114535922278928568.html
It’s not just last month, since 2003 oil and nyse have a 90% correlation.
From 2000 to march 2003 oil and nyse correlation is 0.08 (you got me?? ZILCH!!).
From 1997 to 2000 correlation is -0.17.
There have never been a correlation btw oil and the stock market.
Correlation btw nyse and gold is 93% from march 2003.
And so on and on …
It’s just asset inflation.
Oil and US equity can go up in tandem, fairly indefinitely, given the unusual pattern of world capital flows. Since oil-producing countries are lending a substantial portion of their oil revenues back to the US at low rates, oil demand is relatively inelastic, and the US only accounts for a fraction of world oil revenues, high oil prices may in fact be stimulative to US demand, and this demand effect might offset higher costs faced by producers. Here’s a thought experiment that fleshes out this idea.
Until world capital flows normalize, we are in a looking-glass world, and the impossible or at least improbable — e.g. the simultaneous appreciation of equity, industrial commodities, the dollar, and precious metal — may blossom all around us. Someday the petrodollars and Renminbi-dollars will stop though, and gravity will take hold again.
In the early move off of the lows, as the Fed reflated the economy, Oil and Nasdaq moved in tandem.
Once Oil reached a tipping point — arguably, above $65 — Oil became a weight around the market’s neck.
A correlation chart from 2000
http://img503.imageshack.us/img503/7161/oilcor2ei.png
General earnings question. Over the last year many companies have brought back overseas earnings on a tax free basis based on changes in the law …in order to “create jobs/r&d”. Any idea how these earnings are accounted for in general. Is this action earnings/ cashflow/ tax neutral/negative/positive for a company?