We're going out of order with today's Briefing. I've got to discuss Boeing (NYSE:BA) first, and then we'll get in market recap and a straight talk on gold and oil.
What To Do With Boeing?
Boeing shares, at one point, posted their largest-ever one-day loss, down double digits early in Thursday's trade, before recuperating somewhat into the bell. At the end of the day, the stock was still down 7% - a rather sizable amount of turbulence for such a blue chip name.
At fault is what some have deemed to be aggressive accounting on Boeing's part. The SEC is investigating the company's accounting methods in regard to costs and expected sales of the 747 and 787 programs.
According to a Reuters report, the company has $30 billion in deferred costs for the production of the 787. This is seen as being an unusually large cost to expense in this manner, and perhaps attracted the SEC's interest.
As for the stock, is this a buying opportunity or a stay away situation? My first rule of thumb is if the SEC investigates, a stock is an insta-sell. The SEC is not known for being a particularly aggressive regulator of publicly listed companies, and if it gets around to taking action on something, more often than not there's fire to the smoke.
That said, the SEC doesn't usually launch inquiries about companies of Boeing's size either. If I already owned BA shares, I would grant a rare exception to my rule and not sell immediately. While the company may be forced to make a (very) large one-time write-off and perhaps pay a fine, this doesn't appear the sort of core system accounting issue that leads to an Enron or WorldCom-type outcome.
However, I'm not a buyer of Boeing here. When I was looking at United Technologies (NYSE:UTX), I looked at Boeing as one of its peer comps. (Obviously, these are far from perfect peers, I understand).
Compared to UTX or General Dynamics (NYSE:GD), I don't really see the appeal to Boeing at the current price deck. Its business is getting severely crimped by the strong dollar. For a duopoly (on the commercial side), where your competitor prices in euros and you in dollars, life isn't going well at the moment.
Additionally, the lifespan of old planes rises as the price of oil continues to fall. One of the main drivers of the airline place upgrade cycle is fuel savings - new models generally are much more fuel-efficient. In a world of $100 oil, every drop of jet fuel is precious. At $30 oil, the calculations suddenly look better for keeping your old 737s in service a few more years rather than scrapping them.
If Boeing were cheaper on a valuation basis, you might try a dip-buy here. But the stock isn't priced at a level where you can say, "Hey Ian, I know it's being investigated by the SEC, but you have to buy it anyway". If it drops another 20%, I'm happy to reconsider.
Thursday's Market: Bad, Not Awful
Why'd we discuss Boeing first? Simple. Due to the price-weighted nature of the Dow Jones (NYSEARCA:DIA) index, Dow components with high share prices have a massive impact on the Dow, which in turn, affects investor sentiment.
The current Dow Jones divisor is 6.85, indicating that for every point a Dow component stock moves, the Dow Jones index will change by 6.85 points.
At the lows of the day, Boeing stock was down $14 per share. That means that the Dow - as an index - was down 96 points thanks to one stock getting hit by an SEC inquiry. When the index was down 400 earlier in the day, it was really down 300 points (+100 from Boeing).
But once investors hear that big number and the media starts screaming "crash", then things can build on themselves. Had Boeing not faced an SEC inquiry, Thursday would have been just another bad day in a bad month - not something worthy of a total blowout in bonds and volatility (NYSEARCA:VXX).
As it is, the S&P 500 (NYSEARCA:SPY) held the January low and bounced back strongly. The Nasdaq (NASDAQ:QQQ) closed the day down just 0.4%. It wasn't a good day for bulls by any means, but don't let Boeing's specific issues miscalibrate your read on the whole market.
Oil: Does This Bounce Have A Chance?
Following more OPEC rumors, oil (NYSEARCA:USO) rallied from steep losses on the day back into the green. Supposedly, OPEC members are ready to come to an agreement on production cuts.
Does that mean they're actually ready? Or were they watching the S&P 500 chart and knew that at 1,810 they needed to step in with something to try to fend off another turn further into the global deflationary vortex?
OPEC has taken on some god-like figure for the oil bulls. Despite little evidence that it is willing to cut, or that cuts will meaningfully alter the supply/demand picture, a well-placed OPEC tweet can still sends oil and equities sharply higher.
The cynical part of me suggests that Seeking Alpha should write code to automatically repost the story "Oil Can't Hold Gains" every 12-24 hours after oil rallies more than 3%. It's always timely and almost never wrong.
If oil rallies on some meaningful new piece of information, consider me interested. But I don't give any credence to OPEC rumors at this point. If they do cut, the effect would be almost all psychological rather than meaningfully changing oil economics.
Oil And Gold
We got some comments for yesterday's Briefing, suggesting there's no reason oil and gold should inherently trade together. I disagree. First up, a chart:
First up, of course, the ratio of two prices to each other over 150 years isn't necessarily indicative of anything. The world has changed beyond recognition during that span. However, the general extreme levels have held.
An ounce of gold (NYSEARCA:GLD) always buys at least five barrels of oil, but it never buys more than 40. This has held through countless wars, hyperinflations, depressions, gold rushes, and huge new oil discoveries.
Yes, fracking changed "everything" as far as US oil production goes. But in the history of the world, is fracking more notable in terms of altering the oil landscape than, say, the discovery of the Middle Eastern fields in the early 1900s? Or Spindletop in Texas in January 1901, for that matter?
At the core of it, gold and oil are both anti-dollars. Their prices (in the very long run) tend to follow inflation, since the goods you need to extract oil and gold are subject to the same general ramp-up in costs. Whether you're building an open pit mine or an offshore drilling rig, the price of steel is going to play a massive role in your cost of production. Labor costs are another shared area.
And cost of production ultimately determines price. It takes longer than people expect, but producers (or their creditors) eventually lower supply once prices don't support the current level of output.
Gold miners (NYSEARCA:GDX) drastically overbuilt supply with marginal projects in the decade-long run-up in gold prices. In early 2013, it became crushingly clear that the sector was overrun with malinvestment, and shares (until last month) had been in an unrelenting decline.
Oil followed the same boom-bust cycle, driven by the same overbuilding, this time into fracking and questionable geopolitical jurisdictions overseas. The price held a little longer than gold, but by late 2014, it became apparent that oil was badly oversupplied, and the industry has been in straight collapse since then.
Two takeaways from this. The oil bottom won't be a "V". Gold miners gave you the relevant case study.
GDX data by YCharts
Gold miners appeared to bottom with a powerful capitulation move in late 2014 (remember, this ETF traded in the $60s at the top of the cycle). They tested the low and shot higher in early 2015, leading to many "new bull market" calls.
They then put in another solid bottom in July. This time, there was very little interest in gold miners. I called a buying opportunity in the sector in August, largely because so many of the old gold newsletter types had given up and retired, or moved to pitching bitcoins or other such alternatives. Once the hardcore bulls abandon a trade, there's not a lot of downside left.
But the shares stayed glued to $14 for six months, and then put in a final move lower in January to scare out the last optimists, before finally rallying. Oil stocks aren't just going to bottom one day and turn on a dime higher, making you filthy rich. Look at that GDX chart closely - that's how grinding bear markets tend to bottom.
As for oil and gold, yes, I'd be amenable to a short gold, long oil trade based on the earlier chart.
There's little-to-no evidence that any other commodities are turning higher here, and gold isn't going to stage a one-man run higher while everything else deflates. It did relatively well as a hedge in 2008, but still went down, merely dropping less than other alternatives. Gold isn't about to rip 40% higher during a global deflationary bust.
Remember that the Fed's zero interest rate approach was used by gold supporters as a key selling point during the 2011 run. This was going to supposedly cause a massive inflationary crack-up.
Now that ZIRP has been shown to have created essentially zero inflation, we're hearing the same people tell us that negative interest rates are bullish on gold for the opposite reason. Now, with deflation and negative bank savings rates, investors will go to gold to dodge deflation.
The mind boggles. To some gold supporters, the metal takes on a patent medicine-type quality. It can cure whatever economic ailment that you may face, as long as you have some faith and don't ask difficult questions. Certainly keep the word placebo well out of mind.
None of this is to impugn gold. I own a decent chunk of physical gold, and I occasionally buy mining stocks when they get reasonably cheap. My bull GDX call linked above was timed well. If you use gold as a trading vehicle or a long-term store of value, it serves its purpose well.
But it isn't a fix for everything. If you're buying it now, after a $200/oz move, as a "fear hedge", prepare to lose money once the fear goes away. The disparity between oil and gold prices is simply massive now.
$1,250/oz gold and $25 oil doesn't compute. One or both of those prices is wrong. ($1,250/oz gold and $2/lb copper (NYSEARCA:JJC) also doesn't make economic sense, for reasons beyond the scope of this post).
Disclosure: I am/we are long UTX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I'm short VXX.